Prof. Dr. Sebastian J.

Goerg Economics I - Exercise

Martin Speckner, M.Sc. M.Sc.

Problem Set 7

Question 1 (Production with one variable input)

Labor Capital Output Average product of labor Marginal product of labor

3 8 33 not available
4 8 9
5 8 4
6 8 7,5 5

(a) Fill the empty fields in the above production table.

(b) Draw the total product of labor where the output is a function of the
labor input.

(c) Draw the average and marginal product labor.

Question 2 (Production with one variable input)

A company currently uses 100 machines. Depending on the labor input L
they produce an output of:

Q = −50 + 10L − 0, 02L2 ;

(a) Calculate the average and marginal product of labor and draw both
lines in a diagram.

(b) For which labor input L∗ does the average product reach its maximum?
What is the average and marginal product of labor for this input L∗ ?

1
Prof. Dr. Sebastian J. Goerg Economics I - Exercise
Martin Speckner, M.Sc. M.Sc.

Question 3 (Production with two variable inputs)

A company is producing according to the production function:

Q = K α · L1−α

It applies: 0 < α < 1. For each unit of labor the company pays the wage
rate w and for each unit of capital the interest rate r.
Explain and calculate

(a) the marginal and average products of labor and capital.

(b) the equation of the isocost line for given input prices w and r.

(c) the equation of an isoquant.

(d) the marginal rate of technical substitution M RT SL,K . Show that the
isoquant lines are strictly convex.

(e) the optimal quantities of labor and capital to produce the quantity Q.

(f) the cost function C(Q) for given input prices w and r.