EC207_mt2 - The Colorado College Department of Economics...

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1 The Colorado College Department of Economics and Business Block 7--Econ 207 Midterm 2. Do all 4 questions. Time: 2 hours and 30 minutes. Late submissions are subject to reduction of points Please abide by and sign the Honor Pledge. Turn in question paper along with answer booklet. Be neat and clear with graphs. Good luck. 1. (a) The manager of a firm receives an engineering report claiming that at current levels of labor and capital, an additional hour of capital will add 10 units to output whereas an additional unit of labor adds 20 units to output. The firm’s accountants report that the rental rate of capital is $60 per machine hour whereas the wage rate is $20 per labor hour. Is the firm employing the optimal combination of labor and capital? Why or why not? If not should it hire more labor or capital to reach the optimum? Explain briefly. (3 points) (b) A competitive firm’s production function is given by 5 . 0 5 . 0 K L q = where L is labor and K is capital.
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