Cost-minimization, moving decisions.
A U.S. electronics firm is considering moving its production to a plant in Mexico. Its estimated production function is Q = L 0.5K0.5 . The U.S. factor prices are w = r = 10. In Mexico, the wage is lower than in the United States, but the firm faces the same cost of capital: w * = 2.5 and r* = r = 10.
(a) Assume the firm wants to make the same quantity, regardless of where it is located. Show in a figure how the difference in factor prices affects the mix of inputs used in production in the two countries.
(b) Without doing any calculations, should the firm move? Yes, no, or uncertain. Explain why.
(c) What are L and K, and what is the cost of producing q = 100 units in both countries?