w10_ps5_econ100

w10_ps5_econ100 - Problem Set 5 Economics 100, Winter 2010...

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Problem Set 5 Economics 100, Winter 2010 Due Tuesday 2/16/10, 9:10 am 1. Consider a firm that can choose the amount of labor and the amount of capital to use in the production of cars, in order to maximize its profits in a perfectly competitive market. a. Use isoquants and isocost lines to show the effect on this firm of a reduction in the price of capital, assuming the firm does not change the total quantity of cars produced. b. Show(also using isoquants and isocost lines) how the firm will react to a reduction in the price of capital if it is free to re-optimize and select a new profit maximizing level of output. c. Break the effect in part b into scale and substitution effects of the reduction in the price of capital. Clearly label the scale, substitution, and total effects on both labor and capital. Given the way you drew the total effect, are labor and capital complements or substitutes in production? 2.
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This note was uploaded on 01/16/2011 for the course ECN 100A taught by Professor Parman during the Winter '09 term at UC Davis.

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w10_ps5_econ100 - Problem Set 5 Economics 100, Winter 2010...

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