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-   -   Hello, I am having trouble figuring out the answer to these questions in my review: (https://www.askmehelpdesk.com/showthread.php?t=821538)

  • Feb 9, 2016, 09:13 AM
    Bheyburgh
    Hello, I am having trouble figuring out the answer to these questions in my review:
    A firm has a production function, q=AL^aK^1-a, where 0<a<1. It wants to minimize cost for a given production q. The wage rate and rental rate on capital are w and r, respectively.
    a. Write the Lagrangian expression for the cost minimization problem
    b. Write the first-order conditions
    c. Find the cost minimizing L and K

    and

    Consider a firm with the production function f(L,K) = L^0.5K^0.5. The wage rate and rental rate on capital are w and r, respectively.
    a. Use the Lagrangian to derive the long-run cost function for this firm.
    b. Suppose the government provides a subsidy of $10 per unit of capital to the fir. Rewrite the long-run cost function.

    These are what I got for the answers

    q1.

    a) Larangian
    min L = wL + rK + λ(q – ALaK1-a)


    b) F.O.C
    LL = w – λA(a)La-1K1-a = 0
    LK = r – λA(1-a)LaK-a = 0
    L λ = (q – ALaK1-a) = 0


    c) w/r = λA(a)La-1K1-a / λA(1-a)LaK-a
    w/r = aLa-1K1-a / 1-aLaK-a
    w/r = aK / 1-aL
    *sub 1-a for b*
    K = (wbL/ar)

    L λ = q = ALa(wbL/ar)b
    (q = ALa(wbLb/arb)

    I got stuck and dont know how to finish

    q2.

    a) Larangian:
    L = wL0.5 + rK0.5 + λ[q – L0.5K0.5]

    F.O.C:
    LL = 0.5wL-0.5 – 0.5λL-0.5K0.5 = 0
    LK = 0.5rK-0.5 – 0.5λK-0.5L0.5 = 0
    L λ = q – L0.5K0.5 = 0

    Combine first two conditions:
    0.5wL-0.5 – λ0.5L-0.5K0.5 = 0.5rK-0.5 – λ0.5K-0.5L0.5
    (wL-0.5 / rK-0.5) = (L-0.5K0.5 / K-0.5L0.5)
    (wL-0.5 / rK-0.5) = (K / L)

    Rearrange:
    K = L(wL-0.5 / rK-0.5)
    K = wL0.5 / rK-0.5

    Substitute into third condition:
    q = L0.5(wL0.5 / rK-0.5)0.5
    q = (wL / rK-0.5)0.5
    q = wL0.5 / rK-0.25

    Solve for L:
    L = (qrk-0.25/w)2
    Solve for K:
    K = (w2L/qr)-2

    Cost function: C(w,r,q) = w(qrk-0.25/w)2 + r(w2L/qr)-2 = (qrk-0.25)2 + (w2L/q)-2




    b) If the government grants a subsidy of $10 per unit of capital, the you replace all “K” with “k – 10”
    [qr( k – 10)-0.25]2 + (w2L/q)-2
  • Feb 9, 2016, 05:47 PM
    paraclete
    The question has too much detail
  • Feb 9, 2016, 06:41 PM
    Bheyburgh
    I don't understand? I basically solved it (I think) just looking to see if I went wrong anywhere

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