De La Salle University

School of Economics
MIC1ECO
Term 1, AY 2021 - 2022
Dr. Angelo A. Unite
Assignment 7: Short-Run and Long-Run Production Functions

1. This assignment is a group effort (minimum of 1 student and maximum of 2 students per group), and thus, there
should only be one set of solutions per group. You are not allowed to consult with nor be consulted by other
students currently enrolled in this group. A FINAL GRADE OF 0.0 WILL BE GIVEN TO THE STUDENTS
WHOSE REPORTS ARE PROVEN TO BE COPIES (IN FULL OR IN PART) OF EACH OTHER.
2. For each main problem (indicated by a Roman numeral), answer the sub-questions (indicated by an Arabic numeral)
in their order of appearance. Start answering each main problem (indicated by a roman numeral) in a new sheet. For
each main problem, be sure to indicate the number of the sub- question you are answering. Read the questions
carefully and answer only what is required. Do not make any assumptions other than those given in the problems.
3. Be sure to show the theoretical justification or basis for your answers to each question in this exam. You should
start each answer with a brief discussion of the basis for your answer. The basis is usually an economic concept, a
mathematical definition, or a set of conditions that provides the framework for your answer. Do not just turn in
computations! No explanation and basis, no credit.
4. Simplify all final answers. For final answers that involve numerical values, round off to the nearest 4 decimal places.
5. For questions that require you to determine the sign of derivatives or mathematical functions, be sure to show the
basis for the sign.
6. Your answers should be word processed (MSWord or Pages) on A4-size document with 1-inch margins all around.
You can generate equations using MathType or MS Word’s build-in Equation Editor. See the pdf document
“Guides to Using MathType” for the instructions on how to use MathType in MS Word or Pages. Graphs can be
generated using Mathematica, MSWord, or MSExcel.
7. Avoid using Google Docs as it sometimes destroys formatting and/or equations when exporting to PDF. Microsoft
Word allows real-time collaborative editing (follow this link for a tutorial https://bit.ly/CollabinMSWord).
8. NO SECTION OF YOUR ASSIGNMENT MAY BE HANDWRITTEN OR IN THE FORM OF SCANNED IMAGES.
Submissions with handwritten or scanned answers (in part or in full) will not be given any credit. Answers involving
equations that were not generated using MS Equation Editor or MathType will not be given any credit.
9. Type, sign and date the Pledge of Academic Honesty Pledge below and make it the cover page of your report.

Pledge of Academic Honesty

This is to certify that we did not consult with anyone, including copying the answered assignments of students who
took this course in previous trimesters, in arriving at our answers to this assignment in MIC1ECO. In addition, we
are certifying that we did not allow ourselves to be consulted by other students who are currently enrolled in this
course during their solving the same assignment. We are aware that a final grade of 0.0 will be given to the students
whose reports are confirmed to be copies (full or partial) of each other and students who violated this pledge.

_____Adel He_____________________December 12, 2021__

Signature over printed name and date – Group Member 1

____Julius Ballutay__________________December 12, 2021__

Signature over printed name and date – Group Member 2

10. Save your Word document in PDF file format. The pdf file should be uploaded in Canvas. Be sure that your signature
is on the pledge of academic honesty. No signature/s, no credit.
11. The Canvas facility for uploading of the pdf copy of your word-processed answers closes at 8:00 am of the last day of
submission specified in this syllabus (SCHEDULE OF ASSIGNMENTS). Submissions made outside the Canvas
Assignment facility will not be accepted nor given any credit.
12. Any correction on the mark for this assignment must be brought up with my teaching assistant during the week when
the marked version of this assignment is returned to the students. After this one-week period, any correction on the
mark shall no longer be considered.
13. Any student may be asked to present and discuss his/her group’s solutions in class. The schedule of oral
presentation of answers to the assignments is given in the Learning Plan.
In both Problems I and II, L is the amount of labor employed, K is the amount of capital used, q
is the amount of output produced, w is the price per unit of labor, and r is the price per unit of
capital.

START ANSWERING PROBLEM I IN A NEW SHEET

I. A firm’s long-run production function is given by � = ��� �� . In the short run, the amount of
capital employed by the firm is fixed at �� units. Your mark will depend on the correctness of your
basis and brief explanation for each of the following questions.

1. Find the equation of this firm’s short-run production function.

Because the capital is � = �0 in the short-run production function, we will first substitute the capital
(�) with �0 in the production function.
� = �0
� = 4�2 �2
� = 4�2 �20

2. Find the equation of this firm’s demand for labor in the short run. Briefly explain what is
going on as you answer this question.

To find the demand for labor (L), we must first have L be isolated in the short-run production
function.
� = 4�2 �20
� 2
2 =�
4�0
�
= �2
4�20
�0.5
�=
2�0

3. Suppose the price per unit of labor is ₧4 and the price per unit of capital is ₧8. Find the
equation of the firm’s short run
a. total cost curve

To find the short-run total cost, we will have to use the following equation and substituting the
values.
�� = �� + ��0
Through substitution
�0.5
�� = (4) + (8)�0
2�0
2�0.5
�� = + 8�0
�0
 2�0.5
�� = + 8�0
�0
2�0.5
�� = + 8�0
�0

b. average cost curve

To find the short-run average cost, we will be using the following equation while substituting the
values.
��
��� =
�
Through substitution
2�0.5
+ 8�0
�
��� = 0 2 2
4� �0
2� + 8�20
0.5
��� =
(�0 )(4�2 �20 )
�0.5 + 4�20
��� =
2�2 �30

c. marginal cost curve

To find the short-run marginal cost, we will be using the following equation while substituting
the values.
��
��� =
�
Through substitution
2�0.5
+ 8�0
�0
��� =
4�2 �20
2� + 8�20
0.5
��� =
(�0 )(4�2 �20 )
�0.5 + 4�20
��� =
2�2 �30

d. average variable cost average

To find the average variable cost, we will have to divide the variable cost (VC) by the amount of
output produced (q).
��
��� =
�
Through substitution
2�0.5
�0
��� =
�
 2�0.5
��� =
��0
2
��� = 0.5
� �0

4. Use the relevant answer in part and the necessary condition to find the amount of capital in
the short run that would minimize the firm’s short run cost of producing any given output
level. Simplify your answer.

To determine the amount of capital that would minimize the firm’s cost of short-run production,
we would have to get the derivative of the short-run total cost (SC) with respect to the amount of
capital (K).
���
��
Through substitution
� 2�0.5
+ 8�0
�� �0
2�0.5
− 2 +8
� �0
2�0.5
− 2 =− 8
� �0
3
−2 =− 8�2 �0
1
�0 = 3
4�2

5. Use the relevant answer in part 3, your answer in part 4, and the necessary concept to
determine this firm’s long-run cost function.

To determine the firm’s long-run cost function, first we will get the short-run total cost function
from part 3, and then substitute the capital (�0 ) with the value that we got from part 4.
2�0.5
�� = + 8�0
�0
1
�0 = 3
4�2
2�0.5 1
�= +8 3
1 4�2
3
4�2
 2
�= 3 + 8�2
�2
3
2 + 8�2+2
�= 3
�2
7
2 + 8�2
�= 3
�2

6. Suppose capital is fixed at 4 units in the short run. If the firm produces 4 units of output, how
much money is it sacrificing by not having the ability to optimally choose its level of capital in
the short run?

To determine the amount of money is being sacrificed by the firm because they do not have the
ability to optimally choose its level of capital in the short-run, we will first substitute the values of
the capital (K) and output (q) of the short-run total cost (SC) with the values that are given in part 6.
2(4)0.5
�� = + 8(4) = 33
(4)

Afterwards, that will be subtracted from the short-run total cost (SC), however, the value of capital
(K) will be substituted with the minimized short-run cost that was found in part 4.
2(4)0.5 1
�� = +8 3 = 128.25
1 4(4)2
3
4(4)2

Now we will find the difference between the two values

128.25 − 33 = 95.25

Therefore, the firm is sacrificing ₱95.25 because it does not have the ability to optimally
choose its level of capital in the short run.
 START ANSWERING PROBLEM II IN A NEW SHEET

II. A firm’s long-run production function is given by � = ���.� + ��.� . The price per unit of labor
is ₱40 and the price per unit of capital is ₱10.

1. Using the above information and necessary concepts, write the TWO first-order conditions
that are necessary to minimize this firm’s total cost of producing any given output q, given the
input prices. [Note: You are not being asked to solve for the optimal L and K in this question.]

The two FOCs for cost minimization is given by,

a.)
b.)

where,

2. Using your results in part 1, find this firm’s conditional demand functions for labor
and capital (as functions of only q). [Note: You do not need to verify if the second-order
condition for a minimum total cost is satisfied.]

from number 1. where

Substituting in the output constraint, we have that,

Hence,
3. Using your results in part 2 and the necessary concept, find this firm’s
a. long-run total cost function

The total cost function shows that for any set of input cost and for any output level, the minimum cost
that the firm incurs is given by

from 2. where

The firm’s total cost function is then,

b. long-run marginal cost function

Marginal cost function is found by computing the change in total cost for a change in output produced
which is given by,

from 3.a where

The firm’s marginal cost function is then,

c. long-run average cost function

Average cost function is found by diving total cost to per unit of output which is given by,

from 3.a where

The firm’s average cost function is then,

4. Use the relevant answer in part 3, calculus and words to answer the following questions.
a. What happens to this firm’s long-run marginal cost as it produces more output, ceteris
paribus?
A firm experiences decreasing returns to scale when the marginal cost increases as firm produces more
output which is given by

from 3.b where

���
Since ��
is greater than 0, it means that the firm experiences a decreasing returns to scale.

b. What happens to this firm’s long-run average cost as it produces more output, ceteris
paribus?

The firm experiences diseconomies of scale when the average cost is increasing as firm produces more
output which is given by,

From 3.c where

���
Since ��
is greater than 0, it means that the firm experiences diseconomies of scale.

c. What is the relationship between this firm’s long-run marginal cost and long-run average
cost as long as it produces positive output levels?
The relationship between this firm’s long-run marginal cost and long-run average cost shows the
decreasing returns to scale when

From 3.b and 3.c where

And since

This means that that the firm experiences a decreasing return to scale whenever the firm increases
production.
5. Explain why your results in part 4 are consistent with the nature of this firm’s production
function.

Based from the results of part 4, with the firm experiences both decreasing returns to scale and it experiencing
diseconomies of scale, it can be concluded that the production function of this firm is rather inefficient. A
solution to this is for the firm to increase their production scale to keep up with the its increasing output.