Question: Consider N firms each with the constant-returns-to-scale production function Y = F(K, AL), or (using the intensive form) Y = ALf(k). Assume F() > 0,

Consider N firms each with the constant-returns-to-scale production function Y = F(K, AL), or (using the intensive form) Y = ALf(k). Assume F(•) > 0, f'' (•) < 0. Assume that all firms can hire labor at wage wA and rent capital at cost r, and that all firms have the same value of A.

(a) Consider the problem of a firm trying to produce Y units of output at minimum cost. Show that the cost-minimizing level of k is uniquely defined and is independent of Y, and that all firms therefore choose the same value of k.

(b) Show that the total output of the N cost-minimizing firms equals the output that a single firm with the same production function has if it uses all the labor and capital used by the N firms.

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