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  • Problem Set 3

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    Bill Billson
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    1. The manager's current combination of labor and capital may not be cost-minimizing given the production technology and factor prices. The marginal products of labor and capital are equal to 1, so the manager should alter the mix of labor and capital until their marginal costs are equal to minimize total cost. 2. With a wage of 200 CZK/hour and rental price of 100 CZK/hour, the maximum amount of capital the manager can hire is 800,000 CZK. It may be optimal to hire more labor than capital if the marginal product of labor is higher than the marginal product of capital. 3. The profit will be maximized when the manager chooses the quantity Q and level of

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    problem set for microeconomics final

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    Problem set 3

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    1. The manager's current combination of labor and capital may not be cost-minimizing given the production technology and factor prices. The marginal products of labor and capital are equal to 1, so the manager should alter the mix of labor and capital until their marginal costs are equal to minimize total cost. 2. With a wage of 200 CZK/hour and rental price of 100 CZK/hour, the maximum amount of capital the manager can hire is 800,000 CZK. It may be optimal to hire more labor than capital if the marginal product of labor is higher than the marginal product of capital. 3. The profit will be maximized when the manager chooses the quantity Q and level of

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    © All Rights Reserved
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    4 views2 pages

    Problem Set 3

    Uploaded by

    Bill Billson
    1. The manager's current combination of labor and capital may not be cost-minimizing given the production technology and factor prices. The marginal products of labor and capital are equal to 1, so the manager should alter the mix of labor and capital until their marginal costs are equal to minimize total cost. 2. With a wage of 200 CZK/hour and rental price of 100 CZK/hour, the maximum amount of capital the manager can hire is 800,000 CZK. It may be optimal to hire more labor than capital if the marginal product of labor is higher than the marginal product of capital. 3. The profit will be maximized when the manager chooses the quantity Q and level of

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 2

    Problem set 3

    1. Consider a manager who hires labor and capital to produce output. Production
    technology is strictly convex (this means, that labor and capital are to some extent
    substitutable). Wage rate is 120 CZK/hour and the rental price is 100 CZK/hour. Marginal
    product of labor and capital are MPL = MPK = 1. Is the given combination of labor and
    capital cost-minimizing? Explain. If the combination does not minimize the cost, what
    should the manager do? Should she hire more or less labor? More or less capital?

    2. Consider a manager who hires labor and capital to produce output. Production
    technology is strictly convex (this means, that labor and capital are to some extent
    substitutable). Wage rate is 200 CZK/hour and the rental price is 100 CZK/hour. Planned
    total cost is 800,000 CZK.
    a) What is the maximum amount of capital that the manager can hire with given cost? What
    is the maximum amount of capital that the manager can hire?
    b) Can it ever be optimal to hire more labor than capital given that a unit of labor is
    more expensive than a unit of capital? Explain.

    3. Fill in the blanks in the following table. Assume that w = 250, r = 200, and P = 40. Find Q
    and L for which the profit is maximal.

    K L Q MPL APL APK STC SMC SAC MFCL MRPL TR Profit


    20 0 0
    20 1 50
    20 2 150
    20 3 300
    20 4 400
    20 5 450
    20 6 475
    20 7 475
    20 8 450
    20 9 400
    20 10 300
    20 11 150

    4. Assume that the short-run technology of the firm Alfa can be described with the
    following production function: Q = 72L + 15L2 - 2 L3.
    a) Calculate the marginal product of labor and the average product of labor.
    b) Show that marginal product of labor is equal to the average product of labor at the
    point where the average of product of labor is maximal.
    5. Let LTC = 2y3 – 30y2 + 150y be a long run cost function. Determine whether there are
    economies or diseconomies of scale.

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