What is long-run total cost function

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Reference no: EM13998716

Toby uses apple (A) and labour (L) to produce juice (q). His production function is:

q = min {L/3, A0.5},

where labour is measured in hours, apple in kg, and juice in (large) bottles. For example, if he uses 1 kg of apple and spends 3 hours, he can produce 1 bottle of juice.

a) Draw isoquants for q = 1, q = 2 and q = 3 on a diagram with labour on horizontal axis and kiwi fruits on vertical.

b) Let the price of labour-hour be given by w = $15 and the price for each kg of apple be given by p = $7. What is the optimal amount of labour and fruit to use to produce q bottles of juice, if Toby strives to minimise costs? Illustrate on the graph from a) by drawing corresponding isocost lines.

c) Draw the Toby’s expansion path on a diagram from a). Derive an expression for the expansion path. How does it depend on the wage and the price of apple?

d) What is Toby’s long-run total cost function?

Reference no: EM13998716

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