EC203 Summer 2011

Problem Set 3

1. True or False: The inverse demand for a good is given by p = 60 - 2q. Suppose that the number of consumers doubles. (For each consumer in the market another consumer with an identical demand function appears.) The demand curve shifts to the right, doubling demand at every price, while the slope of the demand curve stays unchanged. 2. True or False: If the price of cucumbers falls by $2 per pound, then the demand for cucumbers will rise by 10 pounds. Therefore we can conclude that the demand for cucumbers is elastic. 3. The inverse demand function for grapes is described by the equation p = 518 - 5q, where p is the price in dollars per crate and q is the number of crates of grapes demanded per week. When p = $38 per crate, what is the price elasticity of demand for grapes? 4. A firm has two factories. One factory has the cost function c1(y1) = 2y21 + 90 and the other has the cost function c2(y2) = 6y22 + 40. If the firm wishes to produce a total of 32 units as cheaply as possible, how many units will be produced in the second factory? 5.Irmas handicrafts has the production function f(x1, x2) = (min{x1, 2x2})1/2, where x1 is the amount of plastic used, x2 is the amount of labor used, and f(x1, x2) is the number of lawn ornaments produced. Let w1 be the price per unit of plastic and w2 be the wage per unit of labor. a. Find Irmas cost function. b. If w1=w2= 1, then find Irmas marginal cost of producing y units of output . c. Find the number of units of output that she would supply at price p . At these factor prices, find her average cost per unit of output. d. If the competitive price of the lawn ornaments she sells is p = 48, and w1=w2= 1, how many will she produce? How much profit will she make? e. More generally, at factor prices w1and w2, find her marginal cost function. At these factor prices and an output price of p, find the number of units she will choose to supply. 6.Given the total cost function of a firm, C(q), show that the average total cost and the marginal cost curves intersect where the average total cost curve is minimized. 7. A competitive firm has the short-run cost function c(y) = 2y3 - 16y2 + 64y + 50. What should be the least price to make the firm to produce a positive amount in the short run? 8. The snow removal business in Minnesota, is a competitive industry. All snowplow operators have the cost function C = Q2 + 4, where Q is the number of driveways cleared. Demand for snow removal in the town is given by Qd = 120 - P. What is the number of firms in this industry in the long-run equilibrium? 9. A competitive firm uses two variable factors to produce its output, with a production function q = min{x1, x2}. The price of factor 1 is $4 and the price of factor 2 is $5. Due to a lack of warehouse space, the company cannot use more than 17 units of x1. The firm must pay a fixed cost of $136 if it

produces any positive amount but doesnt have to pay this cost if it produces no output. What is the smallest integer price that would make a firm willing to produce a positive amount? 10. A firm uses a single input to produce its output, which is sold in a competitive market. It gets quantity discounts on purchases of its input. If it buys x units of the input, the price it must pay per unit of input is 289/x + 3. If it buys no inputs, it doesnt have to pay anything. The firms production function is f(x) = 45x - x2. If the price of the firms output is 1, what is the profit-maximizing amount of input to buy? 11. In a certain kingdom, the demand function for rye bread was q = 381 - 3p and the supply function was q = 5 + 7p, where p is the price in zlotys and q is loaves of bread. The king made it illegal to sell rye bread for a price above 32 zlotys per loaf. To avoid shortages, he agreed to pay bakers enough of a subsidy for each loaf of bread so as to make supply equal demand. How much would the subsidy per loaf have to be?