solution

pplication exercise. Assume that an isoquant representing the output (Q) manufactured by a producer when two factors (capital, K, and labor, L) are employed is defined by the implicit production function Q(K,L) = K 0.4L 0.6 = 500. Also assume that the producer’s isocost line is represented by the equation rK + wL = M, where r = 0.2 denotes interest rate, w = $10 denotes wage rate, and M = $100 000 denotes the amount of investment. Show the equilibrium of this producer (assuming that the equilibrium occurs when the slope of the isoquant is equal to the slope of the isocost line).

 
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