A U. S. electronics firm is considering moving its production to a plant in Mexico. Its estimated production function is q = L0.5 K0.5 (based on Hsieh, 1995). The U. S. factor prices are w = r = 10. In Mexico, the wage is half that in the United States, but the firm faces the same cost of capital: w* = 5 and r* = r = 10. What are L and K, and what is the cost of producing q = 100 units in both countries?
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