Exam2A_12F_Ans - Name Econ100 Intermediate Microeconomics...

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Name: ________________________________________ Econ100’Intermediate’Microeconomics’ ’ Answer’Key’for’ Exam2’ 1. Suppose the production function is (K: capital, L: labor). a. In the short-run, capital is fixed at 4. What is the short-run 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 short-run capital is fixed at 4 again. What is the short-run 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 long-run, 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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