Suppose capital and labor are perfect substitutes resulting in a production function of q = K + L. That is, the isoquants are straight lines with a slope of -1. Derive the long-run total cost function TC = C(q) when the wage rate is w and the rental rate on capital is r

What will be an ideal response?


The firm will always hire the input that is cheapest. So, the function is

If w < r, TC = wq.
If w > r, TC = rq.
If w = r, either equation works.

Economics

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What will be an ideal response?

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Economics