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ajaz_eco_204_2012_2013_chapter_12_Long_Run_CMP_PP

# The cost function is in this case 30 eco 204 chapter

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Unformatted text preview: otal 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. Answer The answer depends on whether When or . the cost function is: () ( ) In this case: 30 ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. When the cost function is: () ( ) In this case: ( ) ( ) Notice that when sugar is too expensive (i.e. ) the elasticity with the new technology is 0, lower than the elasticity with the old technology. When the elasticity is the same. Thus, the new technology is better because when sugar price are too high, Ajax can substitute fructose for sugar. (12.8) The Prestigious Ajax Company (PAC) consists of two divisions “1” and “2”. Each division produces the same product using labor ( ) and fixed capital ( ) as inputs but with different technologies. Division 1 produces output according to: While division 2 produces output according to: Assume both divisions have ample capacity and produce and sell output in distinct markets. Currently and (a) Calculate the optimal labor required to produce target output Show all calculations below. in Division 1 and target output in Division 2. Answer For division 1: Thus: For division 2: 31 ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. ( ) (b) What are Division 1 and 2’s cost functions? Show all calculations below. Answer For division 1: () () ( )( ) () For division 2: () () ( )( ) () (c) Assuming Division 1’s demand function is and Division 2’s demand function is . What are the optimal Division 1 and 2 outputs and prices if there no possibility of arbitrage between the two division’s markets? Show all calculations below. Answer The firm’s profit maxim...
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