Name: ________________________________________
Econ100’Intermediate’Microeconomics’ ’
Answer’Key’for’ Exam2’
1.
Suppose the production function is
(K: capital, L: labor).
a.
In the shortrun, capital is fixed at 4. What is the shortrun production
function? (6pts)
Q = 8L
b.
When both labor and capital can vary, is this increasing returns to scale or
decreasing returns to scale or constant returns to scale? Explain your
answer. (5 pts)
Increasing Returns to Scale
c.
Suppose w=$5 and r=$20 (w: wage, r: the price of capital). In the shortrun
capital is fixed at 4 again. What is the shortrun cost function? (Hint: Short
run total cost function is about the relationship between cost and quantity)
(5 pts)
Cost = wL+rK = 5L+20*4 = 80+5L. Replace L with the answer of 1(a), Cost =
80+(5/8)Q
d.
Total Cost (TC) can be also expressed as TC=FC+VC, where FC is the fixed
cost and VC is the variable cost. Using the answer above, answer the
following: What is the variable cost? How much is the fixed cost? (8 pts)
VC = (5/8)Q; FC = 80
e.
In the longrun, suppose w=$5 and r=$20 again. Draw the isocost curve when
the total expenditure is $40? (Either write it as an algebraic function or draw
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 Spring '14
 Microeconomics, Supply And Demand, pts

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