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Unformatted text preview: YORK UNIVERSITY
Economics 2358 P: Barry Smith
Midterm Exam Winter 3% 2.49 o ?' Instructions. The exam consists of 3 parts: A, B and C. Part A contains choice and is worth 15 marks. Part B contains no choice and is worth 15 points.
Part G contains no choice and is worth 10 marks. You have 80 minutes to com
plete this exam so, roughly speaking, you have 30 minutes for part A, 30 minutes
for part B and 20 minutes for part C. Write your answers in the exam booklets
that have been supplied to you. Be sure to provide the information requested at
the front of the exam booklets. You can only use primitive calculators. If you
answer in pencil, your exam will not be remarked after it is returned to you. Part A
Answer 3 of the following 4 questions. Each question involves a
statement. Be sure to deﬁne all relevant terms entering the questions. Include diagrams when they might clarify your answer. Each question is worth 5 marks. . There are no such things as Giﬁ'en inputs for cost minimizing ﬁrms.
(Oops!) . Suppose that long run total cost is proportional to the square root of
output. What can you deduce about economies of scale and why? (I
would prefer an intuitive argument to a technical one but I will accept
either.) . A proﬁt maximizing competitive ﬁrm will always expand output if price
is greater than marginal cost. . The long run is the best short run. Part B
Answer the following question. It is worth 15 marks. . Suppose that a ﬁrm has a production function given by: y 2 9:15:52 (3.) Derive the short run total cost function for this ﬁrm when :32 is
constrained to be equal to 1 and the factor prices are wl = l and
132 = 1. (b) Graph the short run total, marginal and average cost functions.
(c) Derive the long run cost function and graph it. (d) Compare the long run cost function to the short run cost function
derived for the case where 932 = 1. (Hint: To answer this question
you must ﬁrst ﬁnd the output level where the long run demand for
factor 332 equals 1.) Part C
Answer the following question. It is worth 10 marks. 1. A ﬁrm produces output in two plants. In plant 1, it has a long run cost
function given by: 01(y1) = 21,11. In plant 2 the bug run cost function is
given by: 02(y2) = 4:93 (a) How should the ﬁrm allocate output between the two plants so as to
produce a total output of 1 unit (to +y2 = 1). (b) Next, suppose that the cost function in plant 1 is given by: 01(y1) =
2y‘15. How should the ﬁrm allocate output between the two plants so
as to produce a total output of 1 unit (3J1 + y2 = 1). (Note: This is
hard. You won’t be able to give me an exact solution. I’ll give you
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