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PS 4

# PS 4 - Intermediate Microeconomics Problem Set#4 Due...

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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 project out of its current profits without borrowing. The financial VP says it should choose the
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