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Unformatted text preview: e target output . Show all calculations below.
(c) What is Ajax Cola’s cost function? From this calculate the average and marginal cost functions. Show all calculations
below.
(d) What is the elasticity of total cost with respect to sugar prices? Show all calculations below. 3
ECO 204 Chapter 11: Practice Problems & Solutions for Producer Theory – The Basics in ECO 204 (this version 20122013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (e) Due to greater volatility in sugar prices, Ajax Cola has reconfigured its technology to enable the use of sugar ( )
and/or fructose ( ) as sweeteners, where 2 units of fructose can be perfectly substituted for a unit of sugar (for
constructing production function of sweetener, assume to be good 1 and to be good 2) . Denote the price of
fructose as . Write down Ajax Cola’s production function.
(f) For the production function in part (e), calculate the optimal inputs and cost function of producing target output .
Show all calculations below.
(g) What is the elasticity of total cost with respect to sugar prices in the “new” technology? Was it a good idea for Ajax
Cola to have reconfigured its technology to allow the use of sugar and/or fructose as sweeteners? Show all calculations
below.
(h) Suppose
0.25. What is the expected cost of producing and
with probability 0.75 and
units? Show all calculations below. with probability 4
ECO 204 Chapter 11: Practice Problems & Solutions for Producer Theory – The Basics in ECO 204 (this version 20122013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Solutions
(11.1) True or false: solving a CMP with the production function will yield identical answers for ( ) as solving the CMP with the production function
Do NOT solve the Cost Minimization Problem. ( )? Give a very brief explanation. Answer
False. Unlike utility functions, a positive monotonic transformation of production functions such as: (
( )
) does not represent the same production function and thus the CMP will not give identical levels of inputs. Note however
that the following “transformation” is OK (this is because we haven’t labeled
as ): ( ) (11.2) In the paper “Econometric Analysis of Collusive Behavior in a SoftDrink Market” published in the Journal of
Economics and Management Strategy (Summer 1992), Gamsi, Laffont and Vuong (GLV) estimated the following demand
functions for Coke and Pepsi concentrate syrup based on quarterly data 1968 – 1986: The subscript is for Coke and is for Pepsi and is quarterly quantity of syrup sold, is price of syrup (1986 dollars),
is square root of quarterly advertising expenses (1986 dollars),
if spring/summer and zero otherwise, and is real
income (1986 dollars).
GLV estimated Coke and Pepsi’s average variable cost to be (these are constant across seasons):
● ● What type of “returns to variable inputs” do Pepsi and Coke have? Give a brief explanation.
Answer
Si...
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This document was uploaded on 01/19/2014.
 Fall '14

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