Problem
Suppose that the production function of a single fum in an industry that produces zipple, a nonnarcotic pain killer, out of kapitose and legume is f(k, l) = k1/3l2/3. In this case, firms have no fixed costs. Suppose that the price of kapitose is given by q = 1/2 and the price of legume is $1. Suppose there are precisely 100 firms in the industry; they can leave if they are unprofitable, but no one else can enter.
(a) If demand for zipple is given by D(:p) = 400 -100p, what is the longrun equilibrium? Are there parts of the long-run equilibrium that are indeterminate? (Yes!)
(b) Demand shifts to D(:p) = 750- 150p. What is the new short-run equilibrium where the firms can vary their usage of legumes but not their usage of kapitose? Does the indeterminacy you found in part (a) affect your answer to this part?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.