Midterm_review_2019.pdf - Review question 1 A firm uses a single input labor to produce output q according to the production function q = 8 L The

# Midterm_review_2019.pdf - Review question 1 A firm uses a...

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Review question 1 A firm uses a single input, labor, to produce output q according to the production function q=8L. The commodity sells for \$150 per unit and the wage rate is \$75 per hour. (i)Find the profit-maximizing quantity of L. (ii)Find the profit-maximizing quantity of q. (iii)What is the maximum profit? Review question 2 Consider a firm producing a homogeneous good that requires two normal inputs to production, energy and labor, with prices r and w, respectively. Initially the firm faces market prices of w = 6 and r = 4. These prices then shift to w = 4 and r = 2. Please use a graph to illustrate your answers to the following: (a)In which direction will the substitution effect change the firm’s choice of energy and labor inputs? (b)In which direction will the scale effect change the firm’s energy and labor inputs? (c) Can we say conclusively whether the firm will use more or less labor? More or less energy? Please provide an intuitive explanation for your answer. Review question 3 Zoe is thinking of replacing her old refrigerator which uses 1400 kilowatt hours (kWh) of electricity per year. A new, more efficient model will cost her \$1700 and will use only 600 kWh per year. She pays 10 cents per kWh for her electricity. Assume a time horizon of 4 years (i.e. t=0,1,2,3) and a discount rate of 10 percent. At the end of the three year period, the new fridge is worth \$500 in the used fridge market and the old fridge is worth nothing. Assume that Zoe would buy this refrigerator at the beginning of year 0. Energy savings would be realized in full in all years. (a)Compute the net present expected value of the costs associated with owning and operating the old refrigerator over the four year time horizon. (b)Compute the net present value of the costs of owning and operating the new refrigerator over the four year time horizon. (c)Using the standard discounted utility model discussed in class, we would expect that Zoe will choose to buy the new refrigerator. Why?
Review question 4 An unregulated monopoly supplies electricity to an electricity market comprised of 1000 customers. The total market demand in this market is given by Q=10-P in each hour. The marginal cost of generating electricity is \$4/MWh. The firm has a capacity of 10 (it can produce up to 10 MWh). The