solution

An electronics plant’s production function is Q = 5LK, where Q is its output

rate, L is the amount of labor it uses per period, and K is the amount of capital

it uses per period. The price of labor is $1 per unit of labor, and the price of

capital is $2 per unit of capital. The firm’s vice president for manufacturing

hires you to determine which combination of inputs the plant should use to

produce 20 units of output per period. a. What advice would you give him?

b. Suppose the price of labor increases to $2 per unit. What effect will this

have on output per unit of labor? c. Is this plant subject to decreasing returns to scale? Why or why not?