Optimal long-run production-long-run profits

Reference no: EM132471392

Kendall Square Inc makes and sells ramen to the large number of students around MIT. Kendall Square Inc uses the production function F(K,L)=(K+2L)^(1/3). Input prices are w=2 and r=3 for labor and capital respectively. It operates in a perfectly competitive environment facing a price p=$48, and uses an initial amount of capital K^=12.

If the manager of Kendall Square, Inc works hard, she can manage to transform the long-run cost function by cutting Kendall Square Inc's variable costs in half. That is, she can halve the part of the long-run cost function unrelated to her fixed wage of $54. Suppose that the rest of the market doesn't change: the other firms can only hire mediocre managers who cannot cut the cost functions and so the long-run market price remains fixed.

Determine the optimal long-run production, the long-run profits, and if the variable costs are cut by half, what is the maximum bonus that shareholders would be willing to give to the manager?

Reference no: EM132471392

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