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?

For Red Delicious apple farmers in Washington, 2001 was a terrible year (Linda Ashton, “Bumper Crop a Bummer for Struggling Apple Farmers,” San Francisco Chronicle, January 9, 2001, C7). The average price for Red Delicious was $10.61 per box, well below the shutdown level of $13.23. Many farmers did not pick the apples off their trees. Other farmers bulldozed their trees, getting out of the Red Delicious business for good, taking 25,000 acres out of production. Why did some farms choose not to pick apples, and others to bulldoze their trees? (Hint: Consider the average variable cost and expectations about future prices.)