Assume you are given the following production function:
Q = 46L – L^2 + 11K – 0.5K^2
Since you are a price taker, you have to follow the market price for wages (w = 24), rental rate (r = 10), and the price for the produced good (p = 4).
- Set up the profit function using the values above.
- Assume we are in the short-run and capital (K) is fixed at 5 units. What is the optimal amount of labor?
- Now, let’s assume we are in the long-run, and thus no input is fixed. What is the marginal rate of technical substitution (MRTS)?