Crew Brew produces a popular brand of beer in its mini-brewery located on a small river in Wisconsin. It uses a special formula, combined with the fresh water from the local stream, to produce a drink popular with local folks and tourists who visit during the summer fishing season, and autumn deer hunting season. The production function of Crew follows the formula: Q = 50K + 50L, where Q = barrels of beer, K = units of capital, and L = units of labor.
a) Suppose that capital can be purchased for $8 per unit, and labor costs $6 per unit. What is the optimal combination of inputs for the firm to employ?
b) Suppose that the cost of inputs changes to $7 for a unit of capital, and $9 for a unit of labor. What is the new optimal combination of inputs?
c) Explain the results of a. and b.