12. Suppose a firm’s lease agreement (rental contract) on its facility has expir

Question

12. Suppose a firm’s lease agreement (rental contract) on its facility has expired and it is free to move to a new location or to stay in its current location (i.e., it can change both its level of capital and labor). The firm expects to have a monthly budget of $2000, and the price of labor is expected to be Pl = $8 per unit and the price of capital is expected to be Pk = $20 per unit. Given this information, the firm’s monthly budget constraint is:

A) L = 250 - 0.4K

B) L = 250 - 2.5K

C) K = 100 - 0.2L

D) K = 100 - 2.5L

E) Both B and C

Please show all steps!

Explanation / Answer

B) L = 250 - 2.5K

we know

Budget = labor cost+capital cost

2000=8L+20K

2000-20K=8L

8L=2000-20K

L=2000/8-20K/8

L=250-2.5K

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