Suppose the production function is q = 12 L0.25K0.75. Determine the long-run capital-to-labor ratio (K/L) if the cost a unit of capital (r) is three times the cost of a unit of labor (w)
What will be an ideal response?
The firm minimizes costs by setting MRTS = w/r. MRTS = MPL /MPLK = K/3L = w/r = 1/3. This firm will set K/L equal to one.
Economics
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