This preview shows pages 1–2. Sign up to view the full content.
ECON31403/04, Fall 2010
Answers to:
ECON31403 Practice Questions
1.
(i)
The IQC for Q=8 goes through, for example, the following input combinations:
(L, K) = (1, 16), (2, 8), (4, 4), (8, 2), and (16, 1).
Then, locating these combinations in the KL plane and connecting them by a smooth curve, we
obtain the IQC for Q=8.
(ii)
The two conditions satisfied at the costminimizing input combination are:
(C1)
000
,
2
K
L
2
2
/
1
2
/
1
=
(C2)
r
MP
w
MP
K
L
=
.
Substituting
2
/
1
2
/
1
L
K
L
MP

=
,
2
/
1
2
/
1
K
K
L
MP

=
, w=10 and r=40 into (C2), we can then simplify
(C2) as:
(C2)’
K
4
L
=
.
Then, substituting it into (C1), we have:
000
,
2
K
)
K
4
(
2
2
/
1
2
/
1
=
.
This gives:
500
K
*
=
.
Finally, substituting it back into (C2)’, we also obtain:
000
,
2
L
*
=
.
As for the graph, first draw the IQC for Q=2,000 (which does not have to be precise), and then
draw the ICL:
min
C
K
40
L
10
=
+
,
where
000
,
40
500
40
000
,
2
10
rK
wL
C
*
*
min
=
×
+
×
=
+
=
, which is the minimum cost for
producing Q=2,000.
Then the optimal input combination (2,000, 500) is the tangent point
between the IQC corresponding to Q=2,000 and the ICL corresponding to TC=40,000.
2.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 03/17/2012 for the course ECON 314 taught by Professor Qian during the Spring '10 term at Saint Louis.
 Spring '10
 Qian

Click to edit the document details