Answer Happy

QUESTION 1 a) Consider the following isoquant/isocost mapping where a firm uses only labour and capital in their production process. The figure is based on an hour's worth of production Units of capital (K) Expansion path 22 18 15 700 600 - 500 - 400 O 2 300 o 10 13 15 18 21 IG: GB Units of labour (L) i) Assume that the wage rate is £5 per hour and the rental rate of capital is £6 per hour. Tabulate the long run total cost schedule and sketch the long run total cost curve (based on an hour of production). (10 Marks) NEXT PAGE ii) Under the same assumptions, tabulate the long run average cost schedule and sketch on a separate diagram the long run average cost curve. (4 Marks) iii) Does the production process exhibit decreasing, constant or increasing returns to scale over this range of output in the long run? (1 Mark) b) Raymond consumes only baked beans and sushi, he considers baked beans to be an inferior good. Show what an income expansion path looks like, illustrate at least three optimal points. Plot the amount of baked beans consumed on the X-axis and the amount of sushi consumed on the y-axis. (10 Marks) (Total 25 marks)