Solution to Problem Set 06 _ECO100_

Solution to Problem Set 06 _ECO100_ - Prof Gustavo Indart...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Prof. Gustavo Indart Department of Economics University of Toronto ECO 100Y INTRODUCTION TO ECONOMICS Solution to Problem Set 6 1. a) The expression for the isocost line corresponding to a total cost of $10,000 is: 10,000 = 50 L + 100 K or K = 100 – 0.5 L. And since L = 120, the value of K is: K = 100 – 0.5 (120) = 100 – 60 = 40 This point of tangency is an equilibrium since it represents the combination of L and K that, given a total outlay of $10,000, maximizes the level of output. Any other combination of L and K on the isocost representing an outlay of $10,000 will intersect an isoquant representing a lower level of output. b) In equilibrium, MRTS = w/r = 50/100 = 0.5. As we move down along the isoquant, the MRTS diminishes. The MRTS is equal to MP L / MP K ; therefore, as we move down along the isoquant, MP L decreases (since L increases) and MP K increases (as we K decreases). c)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/10/2010 for the course ECONOMICS ECO100Y taught by Professor Furlong during the Summer '09 term at University of Toronto.

Page1 / 3

Solution to Problem Set 06 _ECO100_ - Prof Gustavo Indart...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online