Unformatted text preview: HOMEWORK 4 DUE AT START OF CLASS MONDAY, JANUARY 24 1. Based on the material in Besanko and Braeutigam: a. What is the difference between a sunk cost and a non—sunk cost? b. Provide an example [not contained in the text] of a sunk cost and explain. c. Provide an example [not contained in the text] of a nonsunk cost and explain. b. Provide an example [not contained in the text] of an opportunity cost and explain. 2. Consider a firm that uses two inputs to produce one output. Denote the amounts of the inputs as L and K and denote the maximum amount of output possible given inputs (L, K) using
the production function Q = f (L, K). Let MRTS mean the marginal rate of technical substitution. a. Suppose f (L, K) = LK.
What is the MRTS at input bundle (L, K) with strictly positive amounts of both inputs? What are all the input bundles with MRTS = 1'? Show your answer on a graph. [Knowing this
type of information will prove useful later.]
What are all the input bundles with MRTS = 4? Show your answer on a graph. b. Suppose f(L, K) = 8L + 2K. What is the MRTS at input bundle (L, K) with strictly positive amounts of both inputs?
What are all the input bundles with MRTS = 1? What are all the input bundles with MRTS = 4? 0. Suppose f (L, K) = L + ln(K + 2) — [11(2) where ln() is the natural logarithm function.
What is the MRTS at input bundle (L, K) with strictly positive amounts of both inputs? What are all the input bundles with MRTS = 1? What are all the input bundles with MRTS = 4? Show your answer on a graph. d. Supposef(L,K)=(L+ 1)(K+ 1)— 1. What is the MRTS at input bundle (L, K) with strictly positive amounts of both inputs?
What are all the input bundles with MRTS = 1? Show your answer on a graph. What are all the input bundles with MRTS = 4? Show your answer on a graph. 3: Suppose a firm that uses two inputs, L and K, to produce one output has MRTS = 5 at
input bundle (L, K) = (100, 160). If labor is to be increased to L = 102, what should the capital
level be in order to maintain the output at the same level as it was with the original input bundle, (100, 160)? READING ASSIGNMENT for Monday, January 24“1
Cost Concepts for Decision Making: Text Chapter 7, pages 225 — 56, 260 ~ 1 ...
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 Spring '08
 MOSTAFABESHKAR

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