Economic Analysis - Research Paper Example

If we consider the production function where Q is the level of output, then Q = F (K, L) output is a function of both capital and labour, however to determine the optimum level of output that will maximize profit we will have to consider the cost of one unit of labour and one unit of capital and further consider the budgeted amount. Given that the cost of one unit of labour is 5 pounds and that the cost of one unit of capital is ten pounds and that our budget for both costs is 100 pounds then our optimum point will be determined as follows.

The maximum amount of capital that can be purchased is 100/10 = 10 and the maximum amount of labour that can be purchased is 100/5 = 20, this information will help us determine the budget line. The next thing to consider is the isoquant, isoquant are curves that depict the possible output that is derived from two factors of productions which in this case are capital and labour The isoquant depicts the level of output that can be produced by different combinations of capital and labour, we determine the most optimum combination of capital and labour by determining the point where the budget line touches the isoquant, and therefore our most optimum levels of capital is C' and for labour its L' as shown above.

Therefore the information that we need to collect is the unit cost of both capital and labour and the budgeted amount so as to determine the budget line and also we need information that will help us determine the isoquant. Question 2AWhen determining on what to produce either cooking pans or sinks we need to determine the cost of producing in terms of capital and labour for each item and also the market price of each item, given that the level of capital and labour are fixed in this case then we have to determine the optimum level of output for both products.

This analysis will take the form of the consumer utility maximizing function where there exist two products, the utility function will represent the revenue collected by the firm and the two products which the consumer chooses will represent the two products produced by the firm.Example If in total we have 200 units of resources (both capital and labour) and that one sink requires 10 units of resources and one cooking pan requires 5 units of resources, then the maximum units of sink that can be produced is 200/10 = 20 and for the cooking pans is 200/ 5 = 40, The revenue curve will be determined by the market price of both products, it combines the possible amount of revenue that can be obtained by different combinations of cooking pans and sinks, the additional information needed therefore is the market price for both products and the amount of resources needed to produce each product.

Question 2BIn the long run the firm will tend to expand its production capacity in order to produce the optimum amount of both products, when the firm increases its capacity more products will be produced in order to realise economies of scale, however the average cost of production for the firm will decrease in the short run but will increase in the long runThe long run and short run average cost curveThe average cost curve will decrease in