Economics Asked by DoubleRainbowZ on July 24, 2021
I am trying to find the long run total cost function, given the firm’s production function $y=L^α K^β$ where $α,β>0$ and two inputs $L$ and $K$ where $ L,K∈R_+^2$, with factor prices $w$ and $r$ where $w,r∈R_{++}^2$
So far, I have tried to solve $min$ $wL+rK s.t.y=L^α K^β$ which then I got $mathcal{L}$$(L,K,λ)=wL+rK+λ(y-L^α K^β)$
Solving for FONC:
$frac{∂L}{∂L}=0⟹w=αλL^{α-1} K^β$
$frac{∂L}{∂K}=0⟹r=βλL^α K^{β-1}$
$frac{∂L}{∂λ}=0⟹ y=L^α K^β$
Then dividing equation 1 by equation 2 I get:
$frac{w}{r}= frac{αλL^{α-1} K^β}{βλL^α K^{β-1} }⟹frac{w}{r}= frac{αK}{βL}⟹L=frac{αr}{βw} K$
However, this is where I run into an issue…
When I substitute $L=frac{αr}{βw} K$ back into equation 3 ($y=L^α K^β$), I get:
$y=(frac{αr}{βw} K)^α K^β$
Which I don’t know how to solve for $K$
I am wondering if I did something wrong, or how do I proceed to the next step, where I can solve for $K$ and $L$ and then proceed to use those values to find the long run total cost function.
Thanks
Pls. do like this
$y=(frac{αr}{βw} K)^α K^β = (frac{αr}{βw})^α K^{(β+α)}$ and then
$$ y (frac{βw}{αr})^α = K^{(β+α)}$$ and finally
$$ y^frac{1}{{(β+α)}} (frac{βw}{αr})^frac{α}{(β+α)} = K := K^star(w,r,y)$$
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