PROBLEM SET #4
1-5 lines
Q.1
Consider the following Cobb-Douglas production function for your company
a. suppose both labor and capital inputs are 20 percent each, determine the approximate
change in output
[s2If
current_user_can(access_s2member_level1)]LnQ=1.345LnL+1.5LnK
b. What type of returns to scale characterizes this production function? How do you know?
[s2If current_user_can(access_s2member_level1)]1.345+1.5=2.845>1 so it is increasing
return of scale
c. Based on the production function, determine an expression for the marginal product of
labor if 20 units of capital are employed.
[s2If current_user_can(access_s2member_level1)]K=20 =89
Q.2
Explain the meaning of a ‘long run average cost curve’. When is it downward sloping? (5
lines)
[s2If current_user_can(access_s2member_level1)]A curve that defines the minimum
average cost of producing alternative levels of output, allowing for optimal selection of
both fixed and variable factors of production. when the curve is declining it indicates
economies of scale.
Q.3
True or False and why? “If it cost $20 on average to produce 100 units of x and it costs
$20.20 on average to produce 101 units of x, then the marginal cost when producing unit
#101 is 20 cents”
It is wrong.
[s2If current_user_can(access_s2member_level1)]MC= TC of 100 units is 20×100=2000
TC of 101 units is 20.2×101=2040.2 =40.2
Q.4
Having just completed a class in “production and costs”, Rohan, the owner of Zee
Industries, decided to pay his workers a wage equal to the value marginal product (w
=MPL*P). He found out that his labour employment is at a point where MPL>APL. In
what stage of production is he operating? Is he maximizing profits at this point? Explain
