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PS5AK_econ100_winter2010

PS5AK_econ100_winter2010 - ECN 100B Winter10 Problem Set5...

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ECN 100B Winter10 Problem Set5 Answer Key by Nikki Yang Q1 a. Isocost: wL+rK=TC Isoquant: F(C,K)=Q 0 If r ↓, we know (1) Isocost 0 Isocost 1 (2) We assume that firm will still produce Q 0 of cars, E 0 E 1 (3) The effect of r ↓, the firm tends to use more capital and less labor E 1 11 E 0 L K Isocost 1 Isocost 0 TC/w TC/r F(L,K)=Q0

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ECN 100B Winter10 Problem Set5 Answer Key by Nikki Yang b. Graph (i) Graph (ii) SUBE 3 L K Isocost 1 Isocost 0 2 SCLE Total effect K and L are substitutes, r↓, K↑ and L ↓ Firm will choose Q2 level which is also higher than Q0 Q2 Q0 TC/w TC/r 1 SUBE 3 L K Isocost 1 Isocost 0 2 SCLE Total effect K and L are complements, r↓, K and L ↑ Firm will choose Q1 level which is higher than Q0 Q1 Q0 TC/w TC/r 1
ECN 100B Winter10 Problem Set5 Answer Key by Nikki Yang Q2 a. L K K L K L K Q L Q MRTS K L MP MP 4 . 0 6 . 0 6 . 0 4 . 0 15 15 b. We know that cost minimization will mean that MRTS = w/r, or K/L = 8/16, which implies L = 2K or K = .5L Next, we can plug this into a production function with the output level set to 2000,

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