PAM200_Section6_Solutions

PAM200_Section6_Solutions - PAM200 – Section 6 Problem...

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Unformatted text preview: PAM200 – Section 6 Problem 6.11 a) At point A , the firm produces 18 units of output. Therefore, since B is on the same isoquant, it must be that L = 17 at B . b) The capital-to-labor ratio at A is 3/5 and MRTS L,K = ½. At B , the capital-to- labor ratio is 1/17, and MRTS L,K = 1/18. Therefore the elasticity of substitution is = = TS ChangeInMR Percentage Ratio pitalLabor ChangeinCa Percentage σ . 6 8 6 9 ) 2 / 1 / ( ) 2 / 1 1 8 / 1 ( ) 5 / 3 / ( ) 5 / 3 1 7 / 1 ( =-- A Cobb-Douglas production function has an elasticity of substitution of 1 (see Appendix in the Textbook, p.219). Therefore this production function has a slightly higher elasticity of substitution, indicating a slightly greater ease of substitutability of inputs. Problem 6.14 If we were to scale up all inputs by a factor λ (that is, replace K by λ K , and L by λ L ), the resulting output would equal λ Q . Therefore a linear production function has constant returns to scale....
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PAM200_Section6_Solutions - PAM200 – Section 6 Problem...

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