The production engineers at Impact Industries have derived the optimal combinations of labor and capital. These are the only two inputs used by Impact. The following chart shows the combinations of labor and capital for three levels of output.

1. Q is the output level. L* is the optimal amount of labor. K* is the optimal amount of capital. The price of labor is $100 per unit. The price of capital is $20 per unit.

Q             L*           K*

120         5              20

180         7              7

240         12           14

2. If the manager of Impact Industries decides to produce 180 units, what will the long-run total cost and long-run average cost of producing 180 units? Show all calculations.

3. An industry consists of two ?rms. The demand function for the product of ?rm i is

qi =24−5pi +2pj.

The marginal cost of production for each ?rm is zero. For what values of the discount factor will grim punishment strategies—with reversion to Bertrand-Nash prices—support a collusive agreement to maximize joint pro?ts?