Consider a firm with production function f (L, K) = 2L+4K. Assume also that the price of capital r=3 and the price of labor w=2. What is this firm's average cost function when both L and K are variable?

b) AC (q) = 3/4

Explanation:

Since Marginal product of labor (MPL) = 2

And Marginal product of capital (MPK) = 4

The price of labor i. e w=2

And, the price of capital i. e R=3

That determines

MPL : W< MPK : R.

Therefore producer will only use capital and k should be Q : 4 and cost will RK i. e. RQ : 4 = 3Q : 4

Hence, average cost is

=TC : Q

=3/4.

Here, Q = quantity and TC = total cost