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Unformatted text preview: Economics 302 Silve Parviainen Intermediate Microeconomics Spring 2007 Answers to Mock Midterm II 1 Production Technology and Cost Curves (a) In a long-run equilibrium, MRTS = w r . With the given information MRTS = MP l MP k = 1 < 2 = w r . Since the factor prices wont change, the firm must change its input combination. Remember that for any well behaving production technology the MRTS is decreasing in l . Hence, the firm should shift towards more capital incentive production in order to be at the long-run optimum. (b) It is possible that the firm is producing in a short-run optimum. In the short run, the capital may be restricted to a too low level, resulting to higher total costs for any given level of output. (c) The total costs of production in the short run are STC = 10 l + 5 k . Since capital is fixed, the variable costs depend only on the optimal labor demand and wage rate....
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This note was uploaded on 09/27/2008 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.
- Spring '08