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Assignment 3 _econ201_fa24 (1)

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Assignment 3 _econ201_fa24 (1)

Uploaded by

adeenaahmed0
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Assignment 3

Intermediate Microeconomics

Fall 2024

Due Date: 17th November 2024

Note: Please submit the assignment in LMS in PDF format. I encourage you to form study
groups to solve the questions but the answers to each question must be written by each student
individually and answered in your own words.

Question 1
If the Cobb-Douglas production function is q = L0.75 K 0.25 , what is the elasticity of output with
respect to labor? In the short run, a firm cannot vary its capital but can vary its labor. Discuss
whether a firm will experience diminishing marginal returns to labor. Now consider a situation
based on the preferences of the two inputs when a firm may not experience diminishing marginal
returns to labor (Hint: You will have to determine the production function when inputs are either
perfect complements or perfect substitutes.)

Question 2
Suppose Alia can receive a higher grade, GA , on the economics final exam. Her grade depends
on the number of hours she spends solving for optimal values of output using Lagrangian method,
L, and the number of hours she spends solving for optimal values using substitution method, S.
The Cobb Douglas production function can be written as GA = 2L0.7 S 0.3 . Her friend Maria has a
production function, GM = 2L0.4 S 0.6 .
a. What is Alia’s marginal productivity from studying Lagrangian method? What is her marginal
productivity from studying substitution method. Do the same exercise for Maria.
b. What is Alia’s marginal rate of technical substitution between the two methods? What is
Maria’s MRTS between the two methods?

Question 3
Under what condition do the following production functions exhibit decreasing, constant and in-
creasing returns to scale?
a.q = L + K
b.q = ALa K b
c.q = (aLρ + [1 − a]K ρ )d/ρ

1
Question 4
A firm’s short run cost function is C(q) = 200q − 6q 2 + 0.3q 3 + 400. Determine the fixed cost, vari-
able cost, the average fixed cost, the average variable cost, the average cost and the marginal cost.
Determine the output level at which the firm would shutdown. Discuss.

Question 5
A textile manufacturing firm has a production function q = 5L0.5 K 0.5 . The wage rate is Rs 100
per hour and the rental cost of capital is Rs 400 per hour. The total cost is Rs 2,000,000.
a. Determine the wage to rent ratio, the marginal rate of technical substitution and solve for the
optimal values of K and L if the firm is producing 25000 t-shirts in one hour. Solve using the
Lagrangian method.
b. Draw a graph depicting the optimal value of output, the isoquant curve and the isocost line.
c. What is the equation for the long run expansion path for the manufacturer. Illustrate it on the
graph.
d. Derive the long run total cost equation as a function of q.

Question 6
For a Cobb-Douglas production function, explain how the production path may change if the wage
increases while the rental rate of capital stays the same.

Question 7
If a firm’s cost function is C(q) = 65 + 35q + q 2 . What level of output, q, should it choose to maxi-
mize its profits if the market price is p? How much does it produce and what is its revenue, cost of
production and profit if p = Rs200. Suppose a specific tax of Rs 20 is imposed. How much should
the firm produce to maximize its after-tax profit? Discuss the impact of the tax on output in terms
of dq/dt and dM C/dq.

Question 8
The elasticity of demand for wheat, ϵ, is -0.5 and supply elasticity, η, is 0.2. Suppose there are
40,000 identical wheat farms supplying to the market. Determine the elasticity of demand for a
single wheat farm. Discuss the slope of the elasticity of demand for a single wheat farm to that of
the market.

Question 9
Each firm in a competitive market has a cost function of C = q + q 2 + q 3 . The market has an
unlimited number of firms. The market demand function is Q = 48 − p. Determine the long run
equilibrium price, quantity per firm, market quantity and number of firms. How do the values
change if Rs 2 of worth of tax is collected from each firm?

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