A firm is currently producing 1140 units of output according to the production function q = L^4/3K^1/2 and faces input prices equal to w = $20 and r = $80.In the short run,capital is fixed at 5 units.In the long run,the firm's costs are A) lower because the firm substitutes towards more labor and away from capital. B) lower because the firm substitutes towards more capital and away from labor. C) higher because the firm substitutes towards more labor and away from capital. D) higher because the firm substitutes towards more capital and away from labor.

Question

Quizplus · Accepted Answer

In the long run, a firm has the flexibility to adjust all of its inputs, including both labor and capital. Given that the price of labor (w = $20) is significantly lower than the price of capital (r = $80), the firm is likely to substitute towards more capital and away from labor if capital becomes relatively more productive or cost-effective compared to labor. This substitution towards the cheaper input (in this case, capital, despite its higher individual price, due to its potential for higher productivity or efficiency gains) can lead to lower costs for the firm in the long run.

A Firm Is Currently Producing 1140 Units of Output According