Question 1:

Answer the following questions about the production process of firms.

a) Suppose the marginal produce of labor is: MPL= 10, the marginal product of capital is:

MPK= 20, while the cost of labor is: W= $5 and the cost of capital is: r= $30. Is the firm minimizing cost? If not, what should the firm do to produce the same level of output, but at a lower cost?

b) Suppose: MPL= 10, MPK= 20, W= $20 and r= $40. Is the firm minimizing cost? If not, what should the firm do to produce the same level of output, but at a lower cost?

c) If the cost of labor increases, while the cost of capital stays the same and the firm wants to produce the same level of output, how will the firm's cost-minimizing levels of labor and capital change?

d) If the costs of labor and capital both increase by 10%, and the firm wants to produce the same level of output, how will the firm's cost-minimizing levels of labor and capital change?