Solution to Problem Set 06 _ECO100_

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

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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)

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## 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.

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

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