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answers to practice questions - ECON-314-03/04, Fall 2010...

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ECON-314-03/04, Fall 2010 Answers to: ECON-314-03 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 K-L plane and connecting them by a smooth curve, we obtain the IQC for Q=8. (ii) The two conditions satisfied at the cost-minimizing 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.
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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.

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answers to practice questions - ECON-314-03/04, Fall 2010...

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