midterm_review_answers_2016 - Q1(i Set up profit maximization problem 150 8 First order conditions for a maximum 0 600 75 75 Profit maximizing choice of

# midterm_review_answers_2016 - Q1(i Set up profit...

• Test Prep
• 1
• 100% (1) 1 out of 1 people found this document helpful

This preview shows page 1 out of 1 page.

Q1 (i) Set up profit maximization problem: ߨ ൌ 150 ∗ 8√ܮ െ 75ܮ First order conditions for a maximum: ݀ߨ ݀ܮ ൌ 0 → 600 √ܮ ൌ 75 Profit maximizing choice of L=75. (ii) Substitute 75 into the production function: q=64 (iii) Substitute L and q into profit function: 150*(64)- (75*64)=4800 Q2 (i) Labor gets relatively more expensive. So the firm will substitute towards energy. Substitution effect will increase demand for energy and decrease demand for labor. (ii) Lower production costs will increase scale of production. Scale effect will increase demand for labor and capital. (iii) We can definitively say that the firm will use more energy. Net effect on labor is #### You've reached the end of your free preview.

Want to read the whole page?

Unformatted text preview: ambiguous. Q3 Compute the net present expected value of the costs associated with using the old refrigerator over the four year time horizon. At t=0: costs are 140 (=1400*0.1) =>\$140 At t=1: costs are 140/1.05=>\$ 133.33 At t=2: costs are 140/1.05 2 =>\$126.98 At t=3: costs are 140/1.05 3 =>\$120.94 NPV=\$521.25 (ii) Compute the net present value of the new refrigerator option over time horizon. At t=0: \$700+\$60=\$760 At t=1: \$60/1.05=\$57.14 At t=2: \$60/1.05 2 =\$54.42 At t=3: \$60/1.05 3 = \$51.83 and subtract 500/1.03 3 (scrap)=\$431.91 NPV=\$491.48 (iii) Zoe would buy the refrigerator, assuming the standard DUM, because\$491.48 < \$521.25....
View Full Document

• Spring '16
• Meredith Fowlie
• lower production costs, time horizon, profit maximization problem, \$51.83, \$54.42

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern  