A U.S.firm currently produces 200 units of output according to the production function q = L^0.5K^0.5 and faces input prices equal to w^U.S. = r^U.S = $11.Should the U.S.firm move their company abroad where they will face input prices equal to w^abroad = $6.50 and r^abroad = $15.00? A) Yes, because the total costs will fall from $3,859 to $2,810. B) No, because the total costs will increase from $2,810 to $3,859. C) No, because the firm has decreasing returns to scale. D) Not enough information is given to answer this problem.

Question

Quizplus · Accepted Answer

To determine whether the U.S. firm should move abroad, we need to compare the total costs of producing 200 units of output in the U.S. versus abroad. 
In the U.S., the total cost would be:
TC = wS1U1P1U.S. * S1 + rS1U1P1U.S. * U1 = $11 * 200^1.5 + $11 * 200^0.5 = $2,049 + $1,810 = $3,859
In the abroad, the total cost would be:
TC = wS1U1P1abroad * S1 + rS1U1P1abroad * U1 = $6.50 * 200^1.5 + $15.00 * 200^0.5 = $1,322.50 + $1,885.57 = $2,810.07
The total cost in abroad is lower than the total cost in the U.S. Therefore, the best choice is A: Yes, because the total costs will fall from $3,859 to $2,810.

A USfirm Currently Produces 200 Units of Output According to the the Production