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=4000.02Q, 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=(p100)/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 = 25p2500.
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 Fall '12
 Danvo
 Economics, Supply And Demand, market supply, inverse market demand, Student number _________________________________

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