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s06-midterm2-4 - Economics 302 section 4 Intermediate...

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Economics 302, section 4 Silve Parviainen Intermediate Microeconomics Spring 2006 Midterm Examination II This is a 80-minute 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 Production Technology Assume that a firm’s production function is q = l 1 2 k 1 2 where l is the amount of labor and k the amount of capital used in producing q . (a) Briefly explain the concept of returns to scale. Determine if this function exhibits increasing, decreasing or constant returns to scale. (b) Over time the production function changes to q = l 1 2 k 3 4 . Verify that this change represents technological progress. (c) Will the firm use more capital or labor as the result of the technological progress? Explain your answer. 2 Cost Minimization Assume, that a firm can hire all labor ( l ) and rent all capital ( k ) it needs from competitive markets at prices w and r , respectively. The firm produces
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