The meat-processing industry in Hungary is perfectly competitive, and there are two types of firms operating, domestic and foreign. Two representative (typical) firms are the domestic-owned Marton’s Meat-grinders and the foreign-owned Kostas’ Kutters (henceforth MM and KK), which use slightly different technology, their production functions are:

For MM: qM = L0.6 K0.4

For KK: qK = L0.5 K0.5

Currently, the wage rate is $5 and the rental rate of capital is $10.

(a) Write down the cost-minimisation condition for the two firms.

(b) What are the equations for the (long-run) expansion paths? Comment. (c) What is the average and the marginal cost for the two firms?

(d) Are foreign-owned firms (like KK) able to survive in a competitive market?

(e) Assume that KK is more efficient than MM, such that: qK =A L0.5 K0.5. A is a scaling factor, representing managerial quality (say Kostas organises production more efficiently and is better at disciplining workers). What is the value of A if both types of firms are able to stay in the market?

(f) What will be the output price in this market?

(g) Assume that the demand function for processed meat is Q=225 – 9p. What is the equilibrium quantity?

(h) Calculate the elasticity of demand at the equilibrium point.

(i) If there are currently 10 domestic firms (like MM) and 5 foreign firms (like KK) in the market, how much will each of them produce?

(j) Calculate the capital and labour input for the two types of firms if qM = L0.6 K0.4 and qK =A L0.5 K0.5 (assume that A is equal to what you found in question e).