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# ECON201Answerstohourexam2 - W ELLESLEY COLLEGE DEPARTMENT...

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WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS ECONOMICS 201-03 JOHNSON Answers to Hour Examination #2 I. Multiple Choice (2 points each - 30 points possible) 1. A 9. B 2. A 10. A 3. A 11. A 4. A 12. A 5. B 13. C 6. C 14. C 7. A 15. C 8. C II. Questions & Problems (40 minutes total - 60 total possible points) A. "Less Shampoo, More Conditioner" (25 minutes - 38 points) a. This firm's production function exhibits DECREASING returns to scale. Why? Well, doubling, say, Land K results in a scaling up ofoutput by a factor of 21/2 which we know is LESS than 2. Thus, doubling all inputs results in a LESS THAN DOUBLING ofoutput ....therefore, DRS. b. To find the profit maximizing demands for L and K, set up the profit function in terms ofonly L and K and then solve the appropriate first order conditions to maximize profit. Some ofyou just set the value ofthe marginal product equal to the input price for both Land K, and that's fine. You should, however, confirm to yourselves that the first-order conditions below are equivalent to that approach (indeed, that's HOW you derive those conditions!): If " 11'.- T ( " ? ~ - IN L- '('f.,-= -1' [C"- + K'>.J-w L- y ¥- ~" -3. n:'h - w = ~ -? l'll(wl'r1f')" lIS' = ~ I -'I ~ \<. Z- _ '\ ::: ~ ~) -rJ-\ - \6 \.?- '\ ) e.rt ~ -

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S~I ~nL~~~~~~ l\\-"",~ ~~~ct--,.~~~ L ~ ~ ~~~~""'~ ~ ~ 1> \ \~~"" b~ \"'~~ V''' 0 . .. ~ t. 1\,t-.\ 'fu"'~ ~\t-'l'i"S +-\''L S .E- - ~ O.k.- ~\s '-.\l-. .SS\ "" IV) ~ \1\,"'\:" l ~) 'b t ~()\fol .' r c. For the profit maximizing supply function, simply plug your L* and K* expressions from (a) into the production function to arrive at the firm's supply function as a function of P, W, and r : ,I \, \-; L"2.-+ ~ L..-::: (~01L t l ~)\7- - _--e::::::=::::::----
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ECON201Answerstohourexam2 - W ELLESLEY COLLEGE DEPARTMENT...

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