Microeconomics 1 Rizki Nauli Siregar, Ph.D.

Odd Semester 2023 Universitas Indonesia

Problem Set 2

Instructions

• You will be graded by completion of this problem set, i.e., no reduction of grades if you
make mistakes in your answers.

• You can work on the problem set with your classmates but submission is individual.
Please state in your submission with whom you work on the problem set if you work in
a group.

• Please combine all your answers into one file only.

• Please submit your work via EMAS before the deadline. Please note that EMAS’ server
has its own clock and we follow EMAS’ clock for submission cut-off.

• The deadline for submission is Friday, 16 October 2023, 17:00 WIB.

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

1. The marginal product of labor in the production of motorbikes is 50 bikes per week. The
marginal rate of substitution of hours of labor for weeks of machine capital is 1/5. What
is the marginal product of capital?

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

2. Do the following functions exhibit increasing, constant, or decreasing returns to scale?

(a) q = 5L0 .5K 0 .5
(b) q = 5K + 2L
(c) q = 5(K + L)1/2

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

3. A computer factory, “PT Canggih”, the following production function:

q = 10L0.5 K 0.5 (1)

where q is the number of computers produced per day, L is hours of labor input, K is
hours of machine time. The firm’s competitor, “PT Jenius”, has the following production
function:

q = 10L0.4 K 0.6 . (2)

(a) If both companies use the same amounts of capital and labor, which company will
generate more output?
(b) If capital is limited to 100 machine hours, but labor is unlimited in supply, which
company has the greater marginal product of labor? Explain briefly.

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

4. A short-movie company has the following short-run cost function:

T C = 200 + 50q (3)

where T C is the total cost in million rupiah and q is the pairs of shoes produced per month.
(a) What is the company’s fixed cost?
(b) If the company produced 10 short movies per month, what would be its average
variable cost?
(c) What would be its marginal cost of production?
(d) What would be its average fixed cost?

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

5. Suppose a firm’s production function is:

q = 10L0.5 K 0.5 . (4)

The cost of a unit of labor is $20 and the cost of a unit of capital is $80.
(a) The firm wants to produce 100 units of output. Find the optimal amount of labor and
capital to be used if the firm wants to minimize costs.
(b) The firm now wants to increase output to 140 units. If capital is fixed in the short
run, how much labor will the firm require?
(c) Calculate the cost-minimizing level of labor and capital in the long run if the firm
wants to produce 140 units.
(d) Draw the firm’s decision in points (a), (b), and (c) above.

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

6. Suppose a competitive firm’s marginal cost of producing output q is given by

M C(q) = 3 + 2q. (5)

Assume that the market price of the firm’s product is $9.

(a) What level of output will the firm produce?
(b) What is the firm’s producer surplus?
(c) Suppose that the average variable cost of the firm is given by

AV C(q) = 3 + q. (6)

Suppose that the firm’s fixed costs are $3. Will the firm be earning a positive, negative,
or zero profit in the short run?

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

7. A firm produces a product in a competitive industry and has a total cost function

C = 50 + 4q + 2q 2 (7)

and a marginal cost function

M C = 4 + 4q. (8)

At the given market price of 20, the firm is producing 5 units of output. Is the firm
maximizing its profit? What quantity of output should the firm produce in the long run?

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

8. A competitive firm has the following short-run cost function:

C(q) = q 3 − 8q 2 + 30q + 5. (9)

(a) Find MC, AC, and AVC and sketch them on a graph.
(b) At what range of prices will the firm supply zero output?
(c) Identify the firm’s supply curve on your graph.
(d) At what price would the firm supply exactly 6 units of output?

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

9. Suppose we have the following information about an industry:

• Market demand: QD = 6500 − 100P

• Market supply: QS = 1200P
q2
• Firm total cost function: C(q) = 722 + 200

• Firm marginal cost function: M C(q) = 2q

200

Assume that all firms are identical and that the market is characterized by perfect compe-
tition.
(a) Find the equilibrium price, the equilibrium quantity, the output supplied by the firm,
and the profit of each firm.
(b) Would you expect to see entry into or exit from the industry in the long run? Explain
briefly. Is profit positive, negative, or zero at this price?
(c) What is the lowest price at which each firm would sell its output in the long run? Is
profit positive, negative, or zero at this price?
(d) What is the lowest price at which each firm would sell its output in the short run? Is
profit positive, negative, or zero at this price? Briefly explain.

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Microeconomics 1 Rizki Nauli Siregar, Ph.D.
Odd Semester 2023 Universitas Indonesia

10. Suppose that a competitive firm has a total cost function

C(q) = 450 + 15q + 2q 2 (10)

and a marginal cost function

M C(q) = 15 + 4q. (11)

If the market price is P = 115 per unit, find the level of output produced by the firm. Find
the level of profit and the level of producer surplus.

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