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Suppose a firm’s production function is given by Q = 2K^1/2 * L^1/2 , where K...

Suppose a firm’s production function is given by Q = 2K^1/2 * L^1/2 , where K is capital used and L is labour used in the production.

(a) Does this production function exhibit increasing returns to scale, constant returns to scale or decreasing returns to scale?

(b) Suppose the price of capital is r = 1 and the price of labour is w = 4. If a firm wants to produce 16 chairs, what combination of capital and labor will it use to minimize costs?

(c) Now, suppose in addition to paying for capital and labor the firm will also have to pay fixed lump-sum tax of 20 to the government. Would this affect your answers for part (a)? Why or why not? (HINT: What kind of cost is this additional tax?)

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