Cost Minimization Practice Problems
From Chapters 7 of Besanko & Braeutigam
6. Explain why, at an interior optimal solution to the firm’s cost-minimization problem, the
additional output that the firm gets from a dollar spent on labor equals the additional output
from a dollar spent on capital. Why would this condition not necessarily hold at a corner
point optimal solution?
7.4. A consulting firm has just finished a study for a manufacturer of wine. It has determined that
an additional man-hour of labor would increase wine output by 1,000 gallons per day.
Adding another machine-hour of fermentation capacity would increase output by 200 gallons
per day. The price of a man-hour of labor is $10 per hour. The price of a machine-hour of
fermentation capacity is $0.25 per hour. Is there a way for the wine manufacturer to lower its
total costs of production and yet keep its output constant? If so, what is it?
7.8. Suppose the production of airframes is characterized by a CES production function:
Q = (L½ + K½)2. Suppose that the price of labor is $10 per unit and the price of capital is $1
per unit. Find the cost-minimizing combination of labor and capital for an airframe
manufacturer that wants to produce 121,000 airframes.
From Old Homework Assignments
1. According to a firm’s production function, you can take away 2 units of labor if you add 5 units
of capital without changing production. The firm’s MRTS is diminishing. The price of labor is
$20, and the price of capital is $40. Which of the following is true at the current input bundle,
assuming you graph capital on the Y-axis and labor on the X-axis?
a. The bang per buck is higher for labor than capital, and the firm’s isoquant is steeper than its
isocost.
b. The bang per buck is higher for labor than capital, and the firm’s isoquant is flatter than its
isocost.
c. The bang per buck is lower for labor than capital, and the firm’s isoquant is steeper than its
isocost.
d. The bang per buck is lower for labor than capital, and the firm’s isoquant is flatter than its
isocost.
2. Cookie Monster Inc. produces cookies using two inputs, dough (L) and chips (K). The firm’s
production function is given by Q=L1/2K1/2. Assume that the price of a batch of cookie dough is
$1 (w=$1), and the price of a cup of chocolate chips is $4 (r=$4). What is the minimum cost of
producing 100 cookies?
a. $200
b. $400
c. $600
d. $850
e. $1000
3. A firm produces a product with labor and capital. Let w = 10 and r = 10 be the prices of labor
and capital, respectively. The firm wants to produce 15 units of its product at the lowest possible
cost. How much labor and capital should it employ in each situation below?
a. Labor and capital are perfect substitutes. A unit of the firm’s product can be produced using
either 5 units of labor and no capital, or 3 units of capital and no labor.
b. Labor and capital are fixed proportion inputs. A unit of the firm’s product can be produced
using 5 units of labor and 3 units of capital.
