Answer+Key+to+HW3 - Answer Key to Homework #3 March 12,...

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Answer Key to Homework #3 March 12, 2010 1. The inputs are helicopters (“capital”) and pilots (“labor”), and the output is delivery of relief. Since the output will not double while one input is doubled, the production process exhibits diminishing marginal product of capital. Since helicopters do not fly themselves, the admiral was likely suggesting that there were enough pilots available to fly them and in that case, the production process had nearly constant returns to scale. 2. The amount of capital needed is proportional to the output. If the amount of labor to operate the catapult did not vary substantially with the size of the projectile, the production process will exhibit decreasing marginal productivity of capital and economies of scale. 3. The subsidy effectively reduces the wage rate, and therefore flattens the isocost lines. With the new, lower effective wage, firms will use more labor and less capital to produce any given level of output. 4. (a). As shown in Figure 4.1, the isoquant for labor-machine technology is shown in the figure, and the isoquant for pure-labor technology is just the intersection point of the former isoquant with the horizontal axis. Isoquant (labor-machine) Isocost (labor-machine) Figure 4.1 (b). As shown in Figure 4.1, the isocost line for labor-machine technology is shown in the figure, and the isocost for pure-labor technology is just the intersection point of 1
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the former isocost line with the horizontal axis. (c). AC (labor-machine) AC (pure labor) Figure4.2 5. (a). Since Lesotho is a price taker in the world market, the demand curve it faces is a horizontal line.
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This note was uploaded on 02/04/2011 for the course EEP 100 taught by Professor Perloff during the Spring '10 term at University of California, Berkeley.

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Answer+Key+to+HW3 - Answer Key to Homework #3 March 12,...

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