Question

A widget manufacturer has an infinitely substitutable production function of the form:

q = 2K + L

If the wage rate (w) is $1 and the rental rate on capital (v) is $1, what cost-minimizing combination of K and L will the manufacturer employ for the three different production levels in part a? What is the manufacturer’s expansion path?

Answer 1

Since RTS = 1/2 < w/v = 1, the manufacturer will use only Capital (K). For q = 20, K = 10; q = 40, K = 20; q = 60, K = 30. The Manufacturer's expansion path is the K axis.

Step-by-step explanation:

See attached picture for graph.