# A firm uses capital and labor to produce a single output good. The production function is given...

## Question:

A firm uses capital and labor to produce a single output good. The production function is given by {eq}F(K, L) = K L^{0.5} {/eq}, where {eq}K {/eq} is the amount of capital and {eq}L {/eq} is the amount of labor employed by the firm. The unit prices of capital and labor are given by, respectively, {eq}r {/eq} = $6 and {eq}w {/eq} = $5. Based on this information, characterize the optimal (output maximizing) allocation of inputs given that the firm decides to limit its total cost to $36,000. Illustrate your solution graphically: draw the relevant isocost line and sketch the relevant isoquant.

## Inflation

Inflation is a general price increase in simple terms. However, price increases continuously. Inflation if crosses a certain mark then it is harmful to the economy to proceed towards growth because the value of money and purchasing power falls. Inflation thus needs to be controlled with the help of proper monetary policy.

## Answer and Explanation: 1

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Output maximisation:

{eq}\begin{align*} \frac{{M{P_L}}}{{M{P_K}}} &= \frac{w}{r}\\ \frac{{0.5{L^{ - 0.5}}K}}{{{L^{0.5}}}} &=...

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Chapter 4 / Lesson 16Learn about the inflation rate. Discover the causes of inflation and how to calculate it. Understand how to use the inflation rate formula through examples.

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