Problem Set 06 (ECO100)

# Problem Set 06 (ECO100) - Prof Gustavo Indart Department of...

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Prof. Gustavo Indart Department of Economics University of Toronto ECO 100Y INTRODUCTION TO ECONOMICS Problem Set 6 1. Suppose the price of labour is \$50 a day and the price of capital is \$100 per day. Further suppose that the firm chooses to spend \$10,000 a day. a) Draw the isocost curve. Add an isoquant tangent to the isocost curve at 120 units of labour. How many units of capital are employed? Is this point of tangency an equilibrium? Explain. b) What is the MRTS at the point of tangency in a. above? What happens to the MRTS as we move down along the isoquant? What happens to the marginal product of labour and capital? c) Let the price of capital fall to \$80 a day. Draw the new isocost curve and add an isoquant to picture the new tangency point. Is the new tangency point also the firm’s new equilibrium? Explain. 2. The following table shows the output per hour of a doughnut producer using alternative combinations of capital and labour: Units of capital Units of labour 1 2 3 3 280

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Problem Set 06 (ECO100) - Prof Gustavo Indart Department of...

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