Midterm_review_2016 - Review question 1 A firm uses a single input labor to produce output q according to the production function q 8 L The commodity

# Midterm_review_2016 - Review question 1 A firm uses a...

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Review question 1 A firm uses a single input, labor, to produce output q according to the production function q8L. The commodity sells for \$150 per unit and the wage rate is \$75 per hour. (i)Find the profit-maximizing quantity of L. (ii)Find the profit-maximizing quantity of q. (iii)What is the maximum profit? Review question 2 Consider a firm producing a homogeneous good that requires two normal inputs to production, energy and labor, with prices r and w, respectively. Initially the firm faces market prices of w = 6 and r = 4. These prices then shift to w = 4 and r = 2. Please use a graph to illustrate your answers to the following: (a)In which direction will the substitution effect change the firm’s choice of energy and labor inputs? (b)In which direction will the scale effect change the firm’s energy and labor inputs? (c) Can we say conclusively whether the firm will use more or less labor? More or less energy? Please provide an intuitive explanation for your answer. Review question 3 Zoe is thinking of replacing her old refrigerator which uses 1400 kilowatt hours (kWh) of • • • 