Answer Happy

Castle Peak Power Station is one of the world's largest and cleanest coal-fired power stations and is operated by China Light and Power.' It employs engineering labour (L) and generation units (K) in power generation. The corresponding input prices are w for L and r for K. The power output is denoted by y. Suppose the production function, y = f(KL), is homogeneous of degree 1, h.d.(1). The cost function is defined as C*(w,r;y) = min{wL+rk: f(K,L) = y} 1. Show that this cost function is increasing in w and r. Do not simply assume differentiability. 2. Slow that the average cost (AC) does not depend on y. 3. Show that the conditional demand function of L is in the form of L'(w,r; y) = yo(w,r).