dolution

 

1. This question relates to the material in the Appendix. The following table shows several methods of producing 500 rubber tires per day. There are two factors, labour and capital, with prices per unit of $3 and $6, respectively.

 

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a. Compute the total cost for each production method and fill in the table.

 

b. Which production method minimizes costs for producing 500 tires?

 

c. Plot the isoquant for 500 tires, with units of capital on the vertical axis and units of labour on the horizontal axis.

 

d. Given the factor prices, draw the isocost line that corresponds to the cost-minimizing production method.

 

e. Now suppose the price of labour rises to $5 per unit but the firm still wants to produce 500 tires per day. Explain how a cost-minimizing firm adjusts to this change (with no change in technology).

 

 
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