A US electronics firm is considering moving its production to a plant in Mexico. Its estimated…


A US electronics firm is considering moving its production to a
plant in Mexico. Its estimated production function is q =
10L0.32K0.56. In the US, the wage rate and the rental cost of
capital are same and equal to $15. At the Mexican plant, the firm
will pay a 10% lower wage and a 10% higher cost of capital.

a) (10 points) What are the L and K and cost of producing q =
250 units in both countries?

b) (5 points) What would be the cost of production in Mexico if
the electronics firm had to use the same factor quantities as in
the US?

c) (10 points) Derive the long run cost function for the firm if
it were to produce in the US.

A US electronics firm is considering moving its production to a plant in Mexico. Its estimated…


A US electronics firm is considering moving its production to a
plant in Mexico. Its estimated production function is q =
10L0.32K0.56. In the US, the wage rate and the rental cost of
capital are same and equal to $15. At the Mexican plant, the firm
will pay a 10% lower wage and a 10% higher cost of capital.

a) (10 points) What are the L and K and cost of producing q =
250 units in both countries?

b) (5 points) What would be the cost of production in Mexico if
the electronics firm had to use the same factor quantities as in
the US?

c) (10 points) Derive the long run cost function for the firm if
it were to produce in the US.

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