THE WORLD LIMIT FOR THE QUESTION IS 600 WORDS

Question 7 FarFlung make computer keyboards. They use both labour, L, and materials, M. in their production of keyboards. The production method they use requires that at least one labour and one material is always employed. FarFlung have a Cobb-Douglas technology which means that their production function is: Q(L,K) = LM. (a) FacFlung can make and sell 160000 computer keyboards. i. ii. How much labour and materials would they need to employ if the price of labour is 100 and the price of materials is 25? (8 marks) If fixed costs are 1000000 then what is the short run total cost of production and the short run average cost of production? (2 marks) (b) FarFlung could move to a new factory, where they will be able to manufacture 360000 computer keyboards. They are confident they can sell all the keyboards, but they will need to reduce price from 20 to 10. Whilst they will be able to use the same technology, the fixed costs will increase to 2000000. i. What is the new level of short run average costs? What does this imply about the shape of the long run average cost curve? (5 marks) ii. Should Earflung move to the new plant? Explain. (5 marks) (c) What could FarFlung do to decrease their costs? (10 marks)