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Question 5

5. How is an isoquant map like an indifference map? In what important respect do the two constructs differ?

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:

7. True or false: If the marginal product is decreasing, then the average product must also be decreasing. Explain

Question 7

9. Currently, 2 units of labor and 1 unit of capital produce 1 unit of output. If you double both the inputs (4 units of labor and 2 units of capital), what can you conclude about the output produced under constant returns to scale? Decreasing returns to scale? Increasing returns to scale? 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:

Derive the total, average and marginal long run cost functions for the production function:

a) Q=K+L, if input prices are wk=6 and wL=10. b) Q=9KL, if input prices are wk=81 and wL=9. c) Plot these functions.

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

A firm has access to two production processes with the following marginal cost curves:

MC1 = 0.4Q and MC2 = 2+ 0.2Q.

a. If it wants to produce 8 units of output, how much should it produce with each process? b. If it wants to produce 4 units of output?

Question 9

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

8. A firm has a production function Q= F(K, L) with constant returns to scale. Input prices are r = 2 and w= 1. The output-expansion path for this production function at these input prices is a straight line through the origin. When it produces 5 units of output, it uses 2 units of K and 3 units of L. How much K and L will it use when its longrun total cost is equal to 70?

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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