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PaulKet PaulKet
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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 five 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?
Textbook 
Microeconomics: Theory and Applications with Calculus

Microeconomics: Theory and Applications with Calculus


Edition: 4th
Author:
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The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

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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.
PaulKet Author
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#2
6 years ago
Really helpful, thank you so very much Smiling Face with Open Mouth
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
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