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Intermediate Microeconomics
Problem Set #4
Due Tuesday, November 6 at 9:30
1)
Suppose that the production function is given by q=L
α
K
β
where
α
>0,
β
>0, and
α
+
β
<1.
Show that (a)
the production function is characterized by diminishing marginal product of labor (that is, calculate the
marginal product of labor and show that it declines with higher quantities of labor), (b) the marginal
rate of technical substitution depends only on the ratio K/L and not on the level of output, and (c) the
production function is characterized by decreasing returns by scale.
2)
Evaluate the following statements.
a)
A jeweler leaves the prices of her gold necklaces at their prices when made even though the price
of gold has since doubled. Her rationale is that "I make money even at the old prices." Does she?
b)
You are working for General Foods and it has an attractive investment project. It can finance the
project by borrowing funds at an interest rate of 10 percent. Alternatively, it can finance the
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This note was uploaded on 03/26/2008 for the course EC 16 taught by Professor Loury during the Fall '07 term at Tufts.
 Fall '07
 Loury
 Microeconomics

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