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2. A firm has production function Q = k^1/2L^1/2 and faces a wage for the labor...

2. A firm has production function Q = k^1/2L^1/2 and faces a wage for the labor input w = 1 and a rental price of capital r = 9

a. The policy of the Federal Reserve brings the rental price of capital to r = 4 Graph the change of the cost minimizing equlibrium explaining the type of substitution that is happening.

b. Compute the new cost function. Suppose a monopoly and show graphically if after this change in the cost function is going to produce more or less.

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