ECO308 Problems in Maximizing output given costs: slope of isoquant = slope of

isocost
A SET OF PROBLEMS ABOUT NOAH AND NAOMI THE GARDEN TABLE
PRODUCERS
1. Suppose Noah and Naomis short-run weekly production function is
Q = F(L) = L, where L is the amount of labor they hire in hours. The
wage rate is $12 an hour. Noah and Naomi have committed to a longterm lease of their production facility, which costs them $250 per
week. This is a sunk cost. What is their short-run weekly cost
function for producing garden tables? Graph it.
Solution:
The relationship between Noah and Naomis labor input and
their garden table output is described by the formula Q = L. Squaring
both sides of this formula we can solve for the number of hours needed
to produce Q tables per week: L = Q2. Multiplying by the wage rate, we
get the variable cost function:
VC(Q) = wL = 12Q2.
The short-run cost function is therefore: C(Q) = FC + VC = 250 + 12Q 2
PRACTICE PROBLEM: 1b. Now try this same problem with a different
production function: Q = f(L) = 2L. Assume that the wage rate is $12 per
hour. Suppose the sunk cost for their fixed garage-space input is $500 per
week. What is their short-run weekly cost function? Graph this cost
function.
2a. Noah and Naomi have decided to start a firm to produce garden tables. If
Noah and Naomi have at least 500 square feet of garage space, their weekly
production is Q = F(L) = L, where L is the amount of labor they hire in hours.
Additional garage space beyond 500 square feet does not increase their
production. The wage rate is $12 an hour, and a 500-square-foot garage rents
for $250 per week. What is their long-run weekly cost function for producing
garden tables? Graph it.
Solution:
The relationship between Noah and Naomis labor input and their garden
table output is described in their production function. So their cost function is:
C(Q) = { 0 if Q = 0

{ 250 + 12Q2 if Q > 0

MORE PROBLEMS
1. Hannah and Sam run Moretown Makeovers, a home remodeling business. The
number of square feet they can remodel in a week is described by the CobbDouglas production function:
Q = F(L,K) = 10L0.5K0.5
Where L is the number of workers and K is the units of capital.
The wage rate is $1,000 per week, and a unit of capital costs $250 per
week.
What is this firms least-cost input combination for remodeling 100
square feet per week? What is their total cost?
Solution:
First, lets solve for the slope of the isoquant (the MRTS):
MRTS = MPL/MPK
MPL = 0.5*10 L0.5 1K0.5
MPK = 0.5*10 L0.5K0.5-1
So MRTS = K/L
Note that in general, the MRTS for a Cobb-Douglas function (like the following:
Q(L,K) = LK ) is:
MRTSLK = (/)(K/L)
Now, to find our optimal combination of capital and labor, lets find the tangency
condition that sets the slope of the isoquant equal to the slope of the isocost:
MRTS = w/r
So, K/L = 1000/250 = 4
That is, the tangency condition holds at the point on the 100-square-foot isoquant at
which the capital-labor ration equals 4 (meaning that the number of units of capital

is four times the number of workers). When Hannah and Sam use L units of labor
and 4L units of capital, output is:
Q(L,K) = 10L0.5(4L)0.5 = 10L0.5 * 2 L0.5 = 20L
So, as an example, to remodel 100 square feet a week requires L = 5 and K = 20.
Their total cost is
TC = wL + rK = 1,000(5) + 250(20) = $10,000 per week.
1b. TEST QUESTION: Suppose instead that Hannah and Sam need to
remodel 200 square feet a week. Their production function and input
prices are the same. What is their least-cost input combination? What
is their total cost?

2. Consider again Hannah and Sams remodeling business. What is their cost
function?
The solution above tells us that to produce Q garden benches, Hanna and Sam need
the amount of Labor L that solves the formula
Q = 20L
And they need four times that amount of capital. So they need (Q/20) workers and
4Q/20 units of capital.
Their cost of producing Q units is therefore:
C(Q) = 1,000(Q/20) + 250 (4Q/20) = 100Q.

2b. PRACTICE QUESTION: Suppose that a unit of capital instead costs

Hannah and Sam 1,000 per week. Their production function is the same.
What is their new cost function?
More problems
1. Suppose Noah and Naomis short-run weekly production function for garden
benches is F(L) = (3/2)L, where L represents the number of hours of labor
employed. The wage rate is $15 an hour. What is their short-run cost
function?
2. Suppose Noah and Naomis short-run weekly production function for garden
benches is F(L) = min{0, L 2}, where L represents the number of hours of
labor employed. The wage rate is $15 an hour. What is their short-run cost
function?

3. Suppose that the production function for Hannah and Sams home
remodeling business is Q = F(L,K) = 10L 0.2K0.3. If the wage rate is $1,500 per
week and the cost of renting a unit of capital is $1,000 per week, what is the
least-cost input combination for remodeling 100 square feet each week?
What is the total cost?
4. Now assume that Hannah and Sam are initially remodeling 200 square feet
per week. What are their short run and long-run cost functions?
5. Now assume that a unit of capital costs $1,000 per week and that Hannah
and Sam are initially remodeling 200 square feet per week. What are their
short-run and long-run cost functions?
6. Suppose that Hannah and Sam have the Cobb Douglas production function of
Q = F(L,K) = 10 L0.25K0.75. Both a worker and a unit of capital cost $1,000 per
week. If Hanna and Sam begin by remodeling 100 square feet per week what
is the least-cost input combination per week? What is the total cost?