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...

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

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