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Economics 203: Intermediate Microeconomics I Instructor: Dr.

Donna Feir

University of Victoria Fall 2013

Problem Set #4 Solutions


Coverage: Chapter 9 and 9A Production and Chapter 10 and 10A Cost. All page and question references refer to the Frank and Parker text. Recommended Completion Date: October 24, 2013.

Question 1:
a) F(K, L) = 4 K1/2 L1/2 ;
( )

, so constant returns to scale.

and b)

, both of which decline with respect to L and K respectively, so this

production function satisfies the law of diminishing returns (LDR). so increasing returns to scale. , both of which are increasing, so neither satisfies the LDR. c) . so constant returns to scale. when and 0 when . when MPK = a when , and 0 when precipitously at with a vengeance! d) . Here the marginal product of each variable input drops then remains constant at 0, so this production function satisfies the LDR

; , so constant returns to scale. The marginal products of both inputs are constant, so this production function does not satisfy the LDR. e) ; , so increasing returns to scale. Both marginal products decline, so satisfies LDR. f) ; , so decreasing returns to scale. All MPs decline, so satisfies LDR.

Question 2: For K = 27, we have

( )

( )

Question 3: Given a CobbDouglas production function of the form

, Since is fixed for all levels of output, we will have increasing returns if a+b > 1, and decreasing returns if a+b < 1. But we cant have both with the same production function.

Question 4: Given K=6 and L=5 and that and

, then

Economics 203: Intermediate Microeconomics I Instructor: Dr. Donna Feir

University of Victoria Fall 2013

Question 5: They are equivalent mathematically, but the measure for production is a cardinal number,
whereas the index for utility is of only ordinal (greater than or less than) significance.

Question 6: False. As shown in the diagram, MP is decreasing from L1 onward, whereas AP does not
begin to decline until L2. As long as MP > AP, AP will be increasing.

Economics 203: Intermediate Microeconomics I Instructor: Dr. Donna Feir

University of Victoria Fall 2013

Question 7: Under constant returns to scale, the output will be 2, under decreasing returns to scale the
output will be < 2, and under increasing returns to scale the output will be > 2 units of output.

Question 8:
a) Since we can always produce one unit with either 1 unit of K or 1 unit of L, cost minimization to produce Q requires that we use Q units of the cheapest of the two inputs. Here, we will produce with capital only and the total cost will be C(Q)=6Q. Average and marginal costs will be equal at AC(Q)=MC(Q)=6.

Question 9:

Economics 203: Intermediate Microeconomics I Instructor: Dr. Donna Feir

University of Victoria Fall 2013

a) The firm minimizes costs when it distributes production across the two processes so that marginal cost is the same in each. If Q1 denotes production in the first process and Q2 is production in the second process, we have Q1 + Q2 = 8 and 0.4Q1 = 2 + 0.2Q2, which yields Q1 = 6, Q2 = 2. The common value of marginal cost will be $2.40 per unit of output. b) Note that for output levels less than 5, it is always cheapest to produce all units with process 1. Hence Q = Q1 = 4 units, and MC = MC1 = $1.60/unit of output.

Question 10: For this production function, as long as the input price ratio (PL/PK) equals 1/2, the
optimal input bundle will always have 2 units of capital for every 3 units of labour, i.e., K = 2L/3. For a total cost of $70, we thus have ( ) , which solves for L = 30 and K=20. (See diagram.) With constant returns to scale, Q = 5 x (30/3) = 50 units, and the unit cost is 70/50 =$1.40/unit.

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