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Maximization

The firm aims to maximize profits by choosing optimal levels of capital (K) and labor (L). The firm faces a production function of q = 100K^0.2 L^0.2 and sells each unit for $100. It costs $8 per unit of L and $2 per unit of K. By taking the first order conditions and solving the optimization problem, the optimal choices are K=29.24, L=7.31, and maximum profits are $175.44.

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Min Jae Park
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28 views1 page

Maximization

The firm aims to maximize profits by choosing optimal levels of capital (K) and labor (L). The firm faces a production function of q = 100K^0.2 L^0.2 and sells each unit for $100. It costs $8 per unit of L and $2 per unit of K. By taking the first order conditions and solving the optimization problem, the optimal choices are K=29.24, L=7.31, and maximum profits are $175.44.

Uploaded by

Min Jae Park
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Prot maximization

The production function is


q = 100K 0:2 L0:2
and the price of the qood is $100 per unit. Input prices are:
w
r

=
=

$8
$2

Find the optimal levels of K and L and the prot.


The rms problem is
max 100K 0:2 L0:2

8L

2K

the rst order conditions are


20K 0:2 L 0:8
20K 0:8 L0:2

= 8
= 2

(1)

then
L
K
K

0:25

4L

Plugging (2) into (1)


20(4L)0:2 L

0:8

L0:6
L
K

8
20 40:2
=
8
= 7:31
= 29:24

therefore, the output is


q

0:2

= 100 (7:31) (29:24)0:2 = 292:4


= 292:4 8 7:31 2 29:24 = $175:44

(2)

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