ps4x313_f08 - d. Graph the short-run supply function for...

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1. Fred and Ted both make stop-watches with Labor (L) and Kapital (K). Suppose that Fred and Ted have the following production functions: x Fred = (KL) 1/2 x Ted = (KL) 2 Fred and Ted both buy inputs in the same input market where w = the price of Labor and r = the price of Kapital. Ima Smart insists that since these two production functions are merely monotonic transformations of each other, Fred and Ted have the same technologies and will end up with same set of cost curves. Do you agree or disagree. Explain/Defend your position. 2. A competitive firm has the short-run cost function c(y) = y 3 - 2y 2 + 5y + 6. Write down equations for: a. The firm’s average variable cost function. b. The firm’s marginal cost function. c. At what level of output is average variable cost minimized?
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Unformatted text preview: d. Graph the short-run supply function for this firm, being careful to label the key points on the graph with the numbers specifying the exact prices and quantities at these points. 3. Socrates owns just one ship. The ship is worth $200 million dollars. If the ship sinks, Socrates loses $200 million. The probability that it will sink is .02. Socrates total wealth, including the value of the ship is $225 million. He is an expected utility maximizer with von Neuman-Morgenstern utility U(W) equal to the square root of W. What is the maximum amount that Socrates would be willing to pay in order to be fully insured against the risk of losing his ship? Econ 3130.1 - Wissink - Fall 2008 PS#4 - XtraQ DUE: Friday October 24 in class...
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