Suppose the production function is q = 12 L0.25K0.75. Determine the lo

Suppose the production function is q = 12 L0.25K0.75. Determine the long-run capital-to-labor ratio (K/L) if the cost a unit of capital (r) is three times the cost of a unit of labor (w).

What will be an ideal response?

ANSWER

The firm minimizes costs by setting MRTS = w/r. MRTS = MPL /MPLK = K/3L = w/r = 1/3. This firm will set K/L equal to one.