solution

A U.S. electronics manufacturer is considering moving its production abroad. Its production function is  (based on Hsieh, 1995), so its MP_L = 0.5q/Land its MP_K = 0.5q/K. In the United States, w = 10 and r = 10. At its Asian plant, the firm will pay a 10% lower wage and a 10% higher cost of capital: w* = 10/1.1 and r* = 10 * 1.1. What are L and K, and what is the cost of producing q = 100 units in both countries? What would the cost of production be in Asia if the firm had to use the same factor quantities as in the United States?