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Mairoon Mairoon
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6 years ago
At Albert's Pretzel Company, MPL = 1/L, and MPK = 1/K. The isoquant for 100 pounds of pretzels daily is shown in the above figure. Albert minimizes the cost of producing 100 pounds of pretzels daily by hiring 5 units of labor and 10 units of capital when w = 50 and r = 25. When r rises to 100, what is the minimum cost of producing 100 pounds of pretzels daily in the short run? in the long run?
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Microeconomics

Microeconomics


Edition: 6th
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#1
6 years ago
In the short run, the input mix cannot change. The short-run cost is (5 * 50) + (10 * 100) = 1250. In the long run, Albert will change the input mix. From the graph, the new mix will be L = 10 and K = 5. To check, the MRTS = K/L and costs are minimized when MRTS = w/r which equals 1/2. As a result, the long-run cost of 100 pretzels is (10 * 50) + (5 * 100) = 1000.
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