Posted by jon on Wednesday, October 17, 2007 at 11:02pm.
Suppose that the economy consists of two types of firms: type A firms which produce output using a technology Qa=Min(1/3K,L) and type B firms which produce output using a technology Qb=Min(1/2K,L). Type A output sells for $1.00, and type B sells for $.50. Assuming that both firms earn zero profits, what is the wage rate and the rate of return to capital?

econ  economyst, Thursday, October 18, 2007 at 9:22am
Im stuck. I get a result where either the wage rate or the price of capital is negative. (I presume Min(1/3K,L) means the minimium of (1/3)*K or L).
So, to produce 1 more unit of Qa, the firm must use 3 units of K and 1 unit of L. That is MPa=3K+L. Similarly, MPb=2K+L.
Let z be the price of K and w be the wage rate. So the marginal cost of for A is 3Kz + Lw. The MC for B is 2Kz + Lw
Now then, each firm will optimize when MC=MR. So, for Firm A: 3Kz+Lw=1.00 and for B: 2Kz+Lw=0.50 Using algebra, I get Kz=0.50. Which implies one of three possibilities (for firm A) Either w must be negative, or 3Kz+Lw is greater than 1.00, which means the firm produces an infinite amount and earns boatloads of profits, or 3Kz+Lw is less than 1.00, which means the firm doesnt produce at all.
I am curious what your instructor says is the final answer.
Answer This Question
Related Questions
 economics  Suppose that the economy consists of two types of firms: type A ...
 econ  Suppose the economy consists of two types of firms: Type A firms which ...
 Economics  Suppose the economy consists of two types of firms: Type A firms ...
 Finance  21. Consider an economy with two types of firms, S and I. S firms all ...
 Microeconomics  Oligopoly  Two firms decide to form a cartel and collude in a ...
 Advanced MicroEconomics  In a competitive market, there are two groups of ...
 Advanced MicroEconomics  In a competitive market, there are two groups of firms...
 managerial economicsQ3  Suppose the inverse market demand equation is P = 80 ¡V...
 Economics  Should a firm shut down its unprofitable operation. Firm uses 70,000...
 ECONOMICS  Two price setting firms have the same price and marginal revenue ...
More Related Questions