7.15. Ajax, Inc., assembles gadgets.

It can make each gadget either by hand or with a

special gadget-making machine. Each gadget can be assembled in 15 minutes by a
worker or in 5 minutes by the machine. The firm can also assemble some of the gadgets
by hand and some with machines. Both types of work are perfect substitutes, and they
are the only inputs necessary to produce the gadgets.

a) It costs the firm $30 per hour to use the machine and $10 per hour to hire a worker.
The firm wants to produce 120 gadgets. What are the cost-minimizing input quantities?
Illustrate your answer with a clearly labeled graph.

b) What are the cost-minimizing input quantities if it costs the firm $20 per hour to use
the machine, and $10 per hour to hire a worker? Illustrate your answer with a graph.

c) Write down the equation of the firm’s production function for the firm. Let G be the
number of gadgets assembled, M the number of hours the machines are used, and L the
number of hours of labor.

7.17. A paint manufacturing company has a production function 𝑄 = 𝐾 + √𝐿. For this

production function, 𝑀𝑃𝐾 = 1 and 𝑀𝑃𝐿 = 1/(2√𝐿). The firm faces a price of labor
w that equals $1 per unit and a price of capital services r that equals $50 per unit.

a) Verify that the firm’s cost-minimizing input combination to produce Q = 10 involves

no use of capital.

b) What must the price of capital fall to in order for the firm to use a positive amount
of capital, keeping Q at 10 and w at 1?

c) What must Q increase to for the firm to use a positive amount of capital, keeping w
at 1 and r at 50?
8.14. Consider a production function of two inputs, labor and capital, given by 𝑄 =
2
(√𝐿 + √𝐾) The marginal products associated with this production function are as
follows:
1 1 1
𝑀𝑃𝐿 = [𝐿2 + 𝐾 2 ] 𝐿−2
1 1 1
𝑀𝑃𝐾 = [𝐿2 + 𝐾 2 ] 𝐾 −2
Let w = 2 and r = 1.

a) Suppose the firm is required to produce Q units of output. Show how the cost-
minimizing quantity of labor depends on the quantity Q. Show how the cost-minimizing
quantity of capital depends on the quantity Q.

b) Find the equation of the firm’s long-run total cost curve.

c) Find the equation of the firm’s long-run average cost curve.

d) Find the solution to the firm’s short-run cost-minimization problem when capital is
fixed at a quantity of 9 units (i.e., K 9).

e) Find the short-run total cost curve, and graph it along with the long-run total cost
curve.

f) Find the associated short-run average cost curve.

8.22. Consider a production function of three inputs, labor, capital, and materials, given
by Q = LKM. The marginal products associated with this production function are as
follows: MPL = KM, MPK = LM, and MPM = LK. Let w = 5, r = 1, and m = 2, where
m is the price per unit of materials.

a) Suppose that the firm is required to produce Q units of output. Show how the cost-
minimizing quantity of labor depends on the quantity Q. Show how the cost-minimizing
quantity of capital depends on the quantity Q. Show how the cost-minimizing quantity
of materials depends on the quantity Q.

b) Find the equation of the firm’s long-run total cost curve.

c) Find the equation of the firm’s long-run average cost curve.

d) Suppose that the firm is required to produce Q units of output, but that its capital is
̅ = 50). Show how the cost-minimizing quantity
fixed at a quantity of 50 units (i.e., 𝐾
of labor depends on the quantity Q. Show how the cost-minimizing quantity of
materials depends on the quantity Q.

e) Find the equation of the short-run total cost curve when capital is fixed at a quantity
̅ = 50) and graph it along with the long-run total cost curve.
of 50 units (i.e., 𝐾

f) Find the equation of the associated short-run average cost curve.

9.9. Ron’s Window Washing Service is a small business that operates in the perfectly
competitive residential window washing industry in Evanston, Illinois. The short-run
total cost of production is 𝑆𝑇𝐶(𝑄) = 40 + 10𝑄 + 0.1𝑄 2 , where Q is the number of
windows washed per day. The corresponding short-run marginal cost function is
SMC(Q) = 10 + 0.2Q. The prevailing market price is $20 per window.

a) How many windows should Ron wash to maximize profit?

b) What is Ron’s maximum daily profit?

c) Graph SMC, SAC, and the profit-maximizing quantity. On this graph, indicate the
maximum daily profit.

d) What is Ron’s short-run supply curve, assuming that all of the $40 per day fixed
costs are sunk?

e) What is Ron’s short-run supply curve, assuming that if he produces zero output, he
can rent or sell his fixed assets and therefore avoid all his fixed costs?
9.32. The long-run average cost for production of hard-disk drives is given by
𝐴𝐶(𝑄) = √𝑤𝑟(120 − 20𝑄 + 𝑄 2 ), where Q is the annual output of a firm, w is the
wage rate for skilled assembly labor, and r is the price of capital services. The
corresponding long-run marginal cost curve is 𝑀𝐶(𝑄) = √𝑤𝑟(120 − 40𝑄 + 3𝑄 2 ).
The demand for labor for an individual firm is

√𝑟(120𝑄 − 20𝑄 2 + 𝑄 3 )
𝐿(𝑄, 𝑤, 𝑟) =
2√𝑤
The price of capital services is fixed at r = 1.

a) In a long-run competitive equilibrium, how much output will each firm produce?

b) In a long-run competitive equilibrium, what will be the market price? Note that your
answer will be expressed as a function of w.

c) In a long-run competitive equilibrium, how much skilled labor will each firm demand?
Again, your answer will be in terms of w.

d) Suppose that the market demand curve is given by D(P) = 10,000/P. What is the
market equilibrium quantity as a function of w?

e) What is the long-run equilibrium number of firms as a function of w?

f) Using your answers to parts (c) and (e), determine the overall demand for skilled
labor in this industry as a function of w.

g) Suppose that the supply curve for the skilled labor used in this industry is Γ(w) =
50w. At what value of w does the supply of skilled labor equal the demand for skilled
labor?

h) Using your answer from part (g), go back through parts (b), (d), and (e) to determine
the long-run equilibrium price, market demand, and number of firms in this industry.