Microeconomic Theory Dr.

Heman Das Lohano

Assignment 3
Due on Wednesday, 24 April 2024
Note:
• Write your assignment by hand using a pen; computer typing is not allowed. Submit it
before the start of class on Wednesday (24 April).
• In case you cannot attend the class, submit a soft copy on LMS by the due date and time.
Additionally, submit a hard copy in the next class.
• Each assignment carries 5 marks. If any assignment is submitted after the due date and
time, 1 mark will be deducted for each day of late submission.

Q:
A firm’s production function is given by the following Cobb-Douglas function:

𝑞 = 𝐴𝑘 0.5 𝑙0.5

where q is the total output in kg per year, k is the quantity of capital input in hours per year,
and l is the quantity of labor input in hours per year. Suppose that the firm is operating in a
perfectly competitive market, where the rental rate of capital is v in PKR per hour of capital,
and the wage rate of labor is w in PKR per hour of labor.

Suppose A = 1 and the firm’s capital stock is fixed at k = 400 in the short run.

(a) Find the short-run production function.

(b) Find the short-run cost function 𝑆𝐶(𝑣, 𝑤, 𝑞).

(c) (i) Solve the profit maximization problem by output approach using the short-run cost
function and find the short-run output supply function.
(ii) Find the profit function by putting the short-run output supply function into total
profits (objective function).

(d) (i) Solve the profit maximization problem by input approach using the short-run
production function and find the short-run input demand function for labor.
(ii) Find the profit function by putting the short-run input demand function for labor into
total profits (objective function).

(e) Find the short-run output supply function by putting the short-run input demand function
for labor into the short-run production function.

(f) Using the envelope properties of profit function (Hotelling’s lemma), find the output
supply function and the input demand function for labor. Verify that the envelope
properties of profit function (Hotelling’s lemma) hold.

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