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Problem Set 5 - ECON – 301 Problem Set 5 1 A packaging...

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Unformatted text preview: ECON – 301 Problem Set 5 1) A packaging firm relies on the production function ¡ ¢£ ¤ ¢ , with ¥¦ § ¡ ¢ and ¥¦ ¨ ¡ £ ¤ © . Assume that the firm’s optimal input combination is interior (it uses positive amounts of both inputs). Derive its long-run total cost curve in terms of the input prices, ª and « . Verify that if the input prices double, then total cost doubles as well. 2) There are currently 10 identical firms in the perfectly competitive gadget manufacturing industry. Each firm operates in the short run with a total fixed cost of ¬­ and total variable cost of ® ¯ , where is the number of gadgets produced by each firm. The marginal cost for each firm is ¥°­ ¡ ­± . Each firm also has nonsunk fixed costs of ©®² . Each firm would just break even (earn zero economic profit) if the market price were ±³ . ( Note : the equilibrium price is not necessarily ±³ when there are 10 firms in the market.) The market demand for gadgets is ´ ¡ ©²³ µ ®¶·¦...
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