Suppose that production for good X is characterized by the following production function, Q = K^0.5L^0.5, where K is the fixed input in the short run.If the per-unit rental rate of capital, r, is $25 and the per-unit wage, w, is $15, then the average variable cost of using 81 units of capital and 9 units of labor is A)$5. B)$75. C)$80. D)there is insufficient information to determine the average variable costs.

Question

Quizplus · Accepted Answer

The production function is Q = K^0.5 * L^0.5. With K = 81 and L = 9, Q = 81^0.5 * 9^0.5 = 9 * 3 = 27. The variable cost is the cost of labor, which is 9 units * $15 = $135. The average variable cost is $135 / 27 = $5.

Suppose That Production for Good X Is Characterized by the Following