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UNIVERSITY OF WATERLOO  Department of Economics  Professor J. Cuenca
Economics 201: Problems and Questions for the Second Term Test
1.
A profit maximizing firm whose production function is given by
X = (K  1)
1/3
(L + 4)
1/6
,
employs in
equilibrium 2 units of K and 60 units of L, with a total cost of $158 at the fixed prices current in a
perfectly competitive market. Calculate the prices
at which the inputs
K and L were bought. [In case you
have no calculus: MP
K
= [ (K  1)
2/3
(L + 4)
1/6
] /3, and MP
L
= [ (L + 4)
5/6
(K  1)
1/3
] /6.
2.
The averagevariablecost function of a profit maximizing firm under perfectly competitive conditions is:
AVC = 2X
2
 10X + 36. The firm's marginal costs are given by
MC = 6X
2
 20X + 36. Calculate the fixed
costs (TFC) knowing that, if the price of X were Px = 260, the firm's economic profit would be π =1300.
[Hint
: calculate the output level that maximizes profits at Px = 260; then recall that π = TR  (TVC +
TFC) ].
Answer
: TFC = 108
3.
John's Lawn Mowing Service is a small business that acts as a price taker (i.e., MR = P). The prevailing
market price of lawn mowing is $20 per acre. John's total costs are given by
TC = 0.1 X
2
+ 10X + 50,
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 Spring '09
 VANDEWAAL
 Economics

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