mtm2ans05

# B the production q l k displays constant returns to

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b) The production function 0.5 0.5 Q L K = + displays constant returns to scale . False: Def'ns: production function : gives maximum output for any given combination of inputs; relates physical inputs to physical units of output. constant returns to scale: a production function has constant returns to scale if increasing all inputs in proportion leads to the same proportionate increase in output. Here, if multiply both inputs by t , output is 0.5 0.5 0.5 0.5 0.5] 0.5 0.5] ( ) ( ) [ ] [ ] tL tK t L K t L K tQ + = + < + = So this production function has decreasing returns to scale. (Note: do not need to identify DRS, only to state that this is not CRS.) 2 marks each definition, 4 for correct assessment.

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Name___________________________________________________________ Student number _________________________________ Lab LF0__________ 203 (F01), 2005; midterm 2 Page 2 of 3 B: (34 points) Read all sections of this question before you begin. Please use at least 3/4 page for your diagram, and label it clearly. There are 500 identical firms in the silver teapot industry. Each firm has a short run marginal cost curve given by MC=100+20q. The equation of the inverse market demand curve is p=400-0.02Q, where Q is market supply. a) (4) Assuming this market is perfectly competitive, define and derive the short run supply curve of an individual firm in this market. Def'n: SR supply curve of firm specifies quantity firm is willing to produce and sell at each price. For p<min AVC, quantity supplied will be 0; for p min AVC, quantity determined where p=MC. Here, MC=100+20q = p implies SR supply curve is q=0 for p<100; for p 100, q=(p-100)/20 2 for def'n, 2 for supply curvre b) (2) What is the market supply curve? Market supply is horizontal summation of firms' supply curves. Here, have 500 identical firms, so market supply is Q = 500q = 25p-2500.
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