Question

# Ed’s building company has the following production function q = 10KL − 1/2KL^2 where q is...

Ed’s building company has the following production function q = 10KL − 1/2KL^2 where q is the number of houses built, L is the quantity of labor Ed employs and K is the quantity of capital Ed uses. In the short run, K is fixed at K¯ = 2

a. Derive MPL and APL.

b. For what values of L is the MPL > 0?

c. For what values of L is the MPL diminishing?

In the long run, both L and K can be easily varied.

d. Derive the MRTS of L for K.

q = 10KL − (1/2)KL2

K= 2 (given in short run)

q = 10(2)L − (1/2)(2)L2

q = 20L − L2

a. Derive MPL and APL:

MPL= Differentiation og q with respect to L= 20-2L

APL= q/L= (20L-L2 ) / L= 20-L

b.

MPL > 0

20-2L > 0

20 > 2L

Divide both sides by 2:

10 > L

It implies that for all value of L less than 10, MPL will be positive.

c.

MPL= 20-2L

Differentiate it with respect to L

dMPL/dL= -2

It implies that as the unit of labor increases by 1 unit it will cause MPL to decrease by 2 units. This will true for all the values of L.

So for all the values of L, MPL is diminishing.

d.

q = 10KL − (1/2)KL2

MRTS=MPL/MPK

MPL= partial differentiate q wrt L= 10K-(1/2)(2)KL

MPL= 10K-KL

MPK= partial differentiate q wrt K= 10L-(1/2)L2

MRTS= (10K-KL) / [10L-(1/2)L2 ]= (10K-KL) / [(20L-L2 )/2]

MRTS= (20K-2KL) / (20L-L2 )

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