PS4_Solutions

PS4_Solutions - Econ306 Intermediate Microeconomics...

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Econ306 – Intermediate Microeconomics Solutions to Problem Set 4 Question 1 ( 1.5 points ) (i) ( 1 point ) The marginal physical products for labor and capital are MPP L = ∂F ( L,K ) ∂L = 3 K, MPP K = ∂F ( L,K ) ∂K = 3 L. The marginal product of labor is constant with respect to the number of workers hired, therefore the production function exhibits constant marginal returns for labor. The situation is similar for capital, meaning that the production function exhibits constant marginal returns for capital as well. (ii) ( 0.5 points ) When the amount of capital used in production changes, so does the marginal physical product of labor. This shows that, in the short run, the firm’s production decision depends on the amount of ”fixed” capital that it has. Question 2 ( 3 points ) (i) ( 1 point ) The cost of production is given by Cost = wL + rK 150 · L + 100 · K = 1 , 500 . The intercepts with the two axes are then 1 , 500 150 = 10 for labor and 1 , 500 100 = 15 for capital. The
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PS4_Solutions - Econ306 Intermediate Microeconomics...

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