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Profit-maximizing output

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Instructions:

Submit a paper copy of the homework in class. Show your calculations to get credit.

1. The Longheel Press produces memo pads in its local shop. The company can rent its equipment and

hire workers at competitive rates. Equipment needed for this operation can be rented at $52 per hour,

and labor can be hired at $12 per worker hour. The company has allocated $150,000 for the initial

run of memo pads.

The production function using available technology can be expressed as:

Q = 0.25K0.25L0.75,

where Q represents memo pads (boxes per hour), K denotes capital input (units per hour), and L

denotes labor input (units of worker time per hour).

MPL = (0.75)(0.25)K0.25L-0.25

MPK = (0.25)(0.25)K-0.75L0.75

b. Determine the cost-minimizing input mix for an investment of $150,000 for a production run

of memo pads.

c. Compute the level of K used. [Hint: Use the cost minimizing ratio and the isocost equation to

solve]

a. C = wL + rK

150,000 = 12L + 52K

𝑀𝑃𝐿 𝑤

=

𝑀𝑃𝐾 𝑟

= K= → 13 𝐾 = 𝐿

c. Thus, for each unit of K used, 13 units of labor are used. The total amount of labor used is

150,000 = 12L + 52(L/13)

= 12L + 4L

= 16L

= 9,375

The amount of capital used per time period is

K = L/13 = 9375/13 = 721.15.

25𝑞2

2. Spacely Sprockets' short-run cost curve is: 𝐶(𝑞, 𝐾) = 𝐾 + 15𝐾, where q is the number of

Sprockets produced and K is the number of robot hours Spacely hires. Currently, Spacely hires 10

𝑞

robot hours per period. The short-run marginal cost curve is: 𝑀𝐶(𝑞, 𝐾) = 50 . If Spacely receives

𝐾

$250 for every sprocket he produces, what is his profit maximizing output level?

Calculate Spacely's profits.

𝑞

MC(q, K) = 50 = P = 250 q = 50.

10

25(50)2

π = Pq - C(q, 10) = 250(50) - { + 15(10)} = 6,100.

10

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