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ps7_09

# ps7_09 - w = r = 1 and p = 3 What levels of k and l will...

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Cornell University Economics 3130 Problem Set 7 Due 3/27/09 1. True/False/Explain. State whether each of the following is true or false, and explain why. Please limit your answers to no more than two sentences. All credit is based on the explanation. (a) A firm’s exit price and shut down price can be found by minimizing its short-run and long-run average costs, respectively. 2. (PS 6 Q 1 cont.) In a previous problem you solved for the “short-run” supply curve of a firm. We had not yet dealt with the issue of the relationship between the average and marginal costs of the firm so we did not address whether the firm would actually produce over the entirety of the function that was solved for. We will continue to assume that your production function is f ( l, k ) = l 1 3 k 1 3 , the price of labor is w and the price of capital is r . (a) Suppose that the firm believes that the following prices will hold for the long-run:
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Unformatted text preview: w = r = 1 and p = 3. What levels of k and l will the ﬁrm choose? (b) Suppose that the level of k is ﬁxed at the level you found in part (a) in the short-run. What is the short-run cost function for the ﬁrm C SR ( y,w,r )? Does the fact that the ﬁrm would exit if the price of the output were less than average cost aﬀect your answer? (c) What are the short run average and marginal cost functions? Does the fact that the ﬁrm would exit if the price of the output were less than average cost aﬀect your answer? (d) What is the ﬁrm’s short-run supply curve? (e) Deﬁne the output level where the short-run average cost and marginal cost are the same as the “short-run minimum ﬁrm output.” What happens to the short-run minimum ﬁrm output when r increases? When w increases? (f) What is the ﬁrm’s shut down price? What is the ﬁrm’s exit price? 1...
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