Question: To answer questions 1 & 2, use the following diagram that shows an isoquant of 3,000 production units and four isocosto lines. Labor and Capital cost $ 100 (each) per unit.

1. Answer the following:

A. At point A, the Marginal Technical Substitution Rate (TMST) is
____________ (less than, greater than, equal to) the relation of prices of the inputs, w / r. The total cost of producing 3,000 units with the combination A is $ ____________.

B. When moving from A to B, the company _______________ (increases, decreases) the labor factor and _______________ (increases, decreases) the capital factor. At point B the TMST is _______________ (less than, greater than, equal to) the price ratio of inputs, w / r. Moving from A to B, the company _______________ (increases, decreases) its total cost by $ _________.

C. At point C the company __________________ the cost of producing 3,000 units of product. The TMST is _______________ (less than, greater than, equal to) the price relation of the inputs, w / r.

D. The optimal combination of inputs is _________ units of labor and _________ units of capital. For this combination, the total cost of producing 3,000 units is $ ____________.

2. Answer the following:

A. At point E, the MP (Marginal Product) per dollar spent on
____________ is less than MP per dollar spent on ____________. The total cost of producing 3,000 units with the input E combination is $ _________.

B. The movement from E to F reduces the MP per dollar spent on ____________ and increases the MP per dollar spent on ____________. This move __________________ (increases, decreases) the cost by $ ____________.

C. In the combination of inputs C the MP per dollar spent on labor is __________________ (less than, greater than, equal to) the MP per dollar spent on capital.

D. The combination of inputs D costs $ ____________. The company would not use this combination to produce 3,000 units because _______________________________________.

3. A company uses 20 units of labor and 30 units of capital to produce 4,000 units of product. In this combination the marginal product of labor is 50 and the marginal product of capital is 40. The labor price is $ 30 and the capital price is $ 20.
to. The MP per dollar of work is _________ and the MP per dollar of capital is _________.

B. The company can increase capital by one unit and reduce labor by _________ units while keeping costs constant. This action ____________ (increase, reduce) the production per _________ units.
C. To maximize output at stated cost, the firm will increase ____________ and reduce ____________ until the TMST equals _________.

4. A packing company uses two inputs: work and glue. Assume that the job costs $ 10 / hour (salary) and that the glue costs $ 5 / gallon and that the company has a budget of $ 100,000. He draws the straight line of isocosto for that company in striped paper. In the same diagram, draw an isoquant curve that indicates that the company can not produce more than 1,000 containers with that budget.

5. Regarding the previous question, suppose that the salary increases to $ 20 / hour while the price of the glue increases to $ 6.00 / gallon. How would the optimal ratio between inputs change as a result of these changes? Use your diagram in explanation.

6. What would happen with the expansion path of the company in the previous question (# 5).