The Sterling Corporation has the following production function for producing snorkels:
q = K + 2 (L)(1/2)
Its input prices are pK = $6 and pL = $4. It can sell as many snorkels as it likes for $20 each, which means that the marginal revenue or MR for each snorkel = $20.
- a. Explain whether the production function is characterized by increasing, constant, or decreasing returns to scale. Show work.
- b. Plot 6 points to scale along the Sterling Corporation?s isoquant on a piece of graph paper. Plot the points for L = 0, 4, 9, 16, 25, and 36. Be sure to plot L values along the horizontal axis and K values along the vertical axis. Connect the 6 points plotted with line segment.
- c. Plot at least 3 isocost lines of appropriate slope on the graph, and find the least-cost combination of capital and labor from among the points you plotted. d. Label the combination on the graph. Note: there are a number of sites that have graph paper for downloading, e.g., http://www.math.kent.edu/~white/graphpaper/.
- D. Find total profits for the Sterling Corporation at the cost-minimizing input mix you found in part b. Show work.
Running head: STERLING CORPORATION
a. Explain whether the production function is characterized by increasing, constant, or
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