Economics 302
Silve Parviainen
Intermediate Microeconomics
Fall 2006
Midterm Examination II
This is a 90minute exam, with closed books and notes. No calculators allowed. There are four questions in
the exam. Each question is worth 25 points. Remember to label your graphs carefully, and show your work.
GOOD LUCK!
1
Technology and Proft Maximization
Assume that a ±rm has a production function
f
(
l,k
)=
l
1
3
k
1
3
, and can buy all labor and capital from
competitive markets at prices
w
and
r
.
(a) Explain the concept of returns to scale. Does this production function exhibit increasing/decreasing/constant
returns to scale?
(b) Find the
proft maximizing
input demand functions,
l
=
l
(
P, w, r, q
)and
k
=
k
(
P, w, r, q
).
(c) Can you determine an optimal output level for this ±rm? Explain your answer brieﬂy in words, or you
can show it mathematically.
(d) If over time, the production function changes to
f
(
l
1
2
k
1
2
, verify that this change represents
technological progress. Is the technological progress labor saving, capital saving or neutral?
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 Fall '08
 TOOSSI
 Economics, Microeconomics, Competitive Firm, shortrun average costs

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