Econ 201, Session 2 in Fall 2022 at DKU

Homework # 4 for Econ 201

Due Tuesday 6:00 pm, Nov 29, 2022 (China Time Zone)
Notes:
• use a pencil or pen with different colors to draw graphs
• submit the e-copy of your hand-written solution to the Sakai assignment site

1. We will investigate the profit-maximizing choice in the two steps that first involve a
strict focus on the cost side. Consider a production process that gives rise to a strictly
convex producer choice set.

(a) Derive the cost curve from a picture of the production frontier.
(b) Derive the marginal and average cost curves from the cost curve.
(c) Illustrate the supply curve on your graph. How does it change if the wage rate increases?
(d) Now suppose the production process gives rise to increasing marginal product of
labor throughout. Derive the cost curve and from it the marginal and average cost
curves.
(e) Can you use these curves to derive a supply curve?
(f) The typical production process is one that has increasing marginal product initially but
eventually turns to one where the marginal product is diminishing. Can you see how
the two cases considered in this exercise combine to form the typical case?

2. Consider again the two ways in which we can view the producer’s profit maximization
problem. Suppose a homothetic production technology involves two inputs, labor and
capital, and that its producer choice set is fully convex.

(a) Illustrate the production frontier in an isoquant graph with labor on the horizontal axis
and capital on the vertical.
(b) Does this production process have increasing or decreasing returns to scale? How
would you be able to see this on an isoquant graph like the one you have drawn?
(c) For a given wage w and rental rate r, show in your graph where the cost-minimizing
input bundles lie. What is true at each such input bundle?
(d) On a separate graph, illustrate the vertical slice (of the production frontier) that
contains all these cost-minimizing input bundles.

(e) Assuming output can be sold at pA, use a slice of the isoprofit plane to show the profit-
maximizing production plan. What, in addition to what is true at all the cost-
minimizing input bundles, is true at this profit-maximizing plan?
(f) If output price changes, would you still profit maximize on this vertical slice of the
production frontier? What does the supply curve (which plots output on the horizontal
and price on the vertical) look like?
(g) Now illustrate the (total) cost curve (with output on the horizontal and dollars on the
vertical axis). How is this derived from the vertical slice of the production frontier that
you have drawn before?
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 Econ 201, Session 2 in Fall 2022 at DKU

(h) Derive the marginal and average cost curves and indicate where in your picture the
supply curve lies.
(i) Does the supply curve you drew in part (f) look similar to the one you drew in part (h)?

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