With L on the horizontal axis and K on the vertical

use an isoquant drawing for the following problem: Your firm uses machines and labor as inputs. Use an Your firm also uses petroleum (oil) to run its machines. Your firm produces chocolate chip cookies.(a) With L on the horizontal axis and K on the vertical, show where you might be in long run equilibrium at the production of 5,000 cookies. The price of L is “w”, and the price of K is “r”. Now: In the SR (short run), with L as a variable factor, (b) where might you end up on the diagram if the w rises relative to r when you do not want your total costs to rise? (c) What happens to the MPK in this case? Why? (d) What happens to the MPL in this case? Why? (e) Will you still be producing 5,000 cookies? (1) Will your new SR position always be efficient? Explain. (g) In the LR (long run), what will happen to the relative use of the two factors? (b) What can you say about the relative movements of the marginal products of the L and K, and (i) what will be the relation between these marginal products and the prices of the factors? Now go back to your original LR equilibrium position in the diagram. The price of oil ‘ rises. (j) What do you expect to occur on your diagram in the SR and the LR? (k) What happens to the MPL and MPK in these cases due to the oil price rise? (I) If you want your costs to remain the same, will you still be producing 5,000 cookies?

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