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Problem Set 6 - Microeconomics I

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0% found this document useful (0 votes)
18 views13 pages

Problem Set 6 - Microeconomics I

CDC

Uploaded by

mariocaseiro10
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Mario Caseiro Martinez

1. Suppose that work (L) and capital (K) can be combined to produce Y units of
output as represented by the following production function: Y = 30K + 10L. The
firm wants to produce 600 units of output.
(a) Draw the isoquant that corresponds to this level of production (600 units) in
the space (L, K) (that is, in a graph where L is on the horizontal axis and K
is on the vertical one).
- The line that passes through the points (L, K) = (60, 0) and (L, K) = (0, 20) has a slope of
-3.

(b) Analyze how L and K can be substituted while producing Y units: How many
units of K can be replaced by a unit of L without changing output? How many
units of L can be replaced by a unit of K without changing output? Does your
answer depend on the initially employed quantities employed L and K?
- One unit of labor (L) can be replaced by 1/3 units of capital (K). One unit of capital can
be replaced by 3 units of labor. The answer does not depend on the level of L or K.

(c) Suppose the price (r) of capital is 1000e (per machine per week). What
combination of inputs will the firm employ if the weekly wage for each worker
is 400e?
- Since one unit of capital replaces 3 units of labor, and the price of capital is 1000, which
is less than the cost of three units of labor (1000 < 3·400), the company uses the
combination (K, L) = (0, 20).

(d) Suppose the price of capital is still 1000e (per machine per week). What
combination of inputs will the firm employ if the weekly wage for each worker
is 300e?
- Now the company uses the combination (K, L) = (60, 0).
Mario Caseiro Martinez

Cost curves

a) Figure 1: Decreasing returns to scale.


Figure 2: Constant returns to scale.
Figure 3: Increasing returns to scale.
Figure 4: Increasing returns to scale until Y′ and then decreasing returns to scale.

b) Figure 5: Decreasing returns to scale.


Figure 6: Constant returns to scale.
Figure 7: Increasing returns to scale.
Figure 8: Increasing returns to scale until Y′ and then decreasing returns to scale.

c) The MC curve is above the AC curve when it is increasing and below the AC curve when it is
decreasing. Only Figure 5 satisfies this condition. Figures 6, 7, and 8 are impossible.
Mario Caseiro Martinez

3. (∗) The short run cost curve of a firm is C(Y ) = 1000 + 40Y^2.

(a) Find the variable cost function, V C(Y ), and the fixed cost function, F C. Draw
these in a graph with Y on the horizontal (and the cost, expressed in e’s, on
the vertical) axis.
- VC(Y) = 40Y^2, CF(Y) = 1,000.

(b) Find the short run average cost function, AC(Y ), and the average fixed cost
function, AF C(Y ) and the average variable cost function, AV C(Y ). Draw
these curves in a new graph with Y on the horizontal (and the cost, expressed
in e’s, on the vertical) axis.

(c) Find the short run marginal cost curve, MC(Y ). Draw this curve in the
graph of part (b), and show that MC(Y ) passes through the minimum of the
average cost curve, AC(Y ), and through the minimum of the average variable
cost curve, AV C(Y ).

(d) Now draw the short run marginal cost curve, MC(Y ), in a new graph again
with Y on the horizontal axis (and cost expressed in e, on the vertical). Show
that the variable cost V C(Y ), can be computed as the area below the marginal
cost curve, MC(Y ), until the production level Y . (Hint: the area of a triangle
is 1/2 of the product of the base with the height).
- This one I don’t understand how to do it :(
Mario Caseiro Martinez
Mario Caseiro Martinez
Mario Caseiro Martinez

(a) Find the equation that defines the average cost, AC(Y ). What is the minimum
efficient scale for this firm?
Mario Caseiro Martinez

(b) In what range of production does the firm’s underlying production technology
exhibit increasing returns to scale (also called economies of scale)? In what
range does it exhibit decreasing returns to scale (also called diseconomies of
scale)?
Mario Caseiro Martinez

6. Consider the long-run cost function given by c(y) = y + 4y^2 + 1.


(a) Find the average cost, AC(y).

(b) Find firms long-run supply function.

(c) Suppose that market demand is given by D(p) = 36 − 2p. All firms have
identical long-run cost functions. How many firms enter in the long-run?

(d) What is the long-run equilibrium price and quantity.


Mario Caseiro Martinez

7.
a)

b)

c)
Mario Caseiro Martinez

When the market price is above the shutdown price, the firm will continue to produce where
marginal cost equals price.

d)
The short-run supply curve will be the portion of the firm's marginal cost curve that lies above
the shutdown price. Since each firm has the same cost structure, the industry supply curve will
be the sum of the individual firm's supply curves.
e)

At equilibrium, demand equals supply, so we equate the industry supply curve with the demand
curve to find the equilibrium price. Then, we find the corresponding quantity of gadgets
produced by each firm.

f) I don’t understand
g) It is consumer surplus.
Mario Caseiro Martinez

8. In a market you have the following supply and demand curves:


D(p) = 10 − 5p and S(p) = 2 + 8p.

a) The equilibrium in a market is the point where the quantity of goods supplied by producers is
equal to the quantity of goods demanded by consumers. To find the equilibrium in this market,
we need to set the supply, S(p), equal to the demand, D(p):

Unset
a) S(p) = D(p)

Substituting the given functions for S(p) and D(p), we get:

Unset
b) 2 + 8p = 105p

Solving for p, we get:

Unset
c) p = 2/103

Substituting this price back into either the supply or demand function, we can find the
equilibrium quantity, Q:

Unset
d) Q = S(2/103) = 2 + 8(2/103) = 18/103

Therefore, the equilibrium point is (2/103, 18/103).

b) b) At the equilibrium price in (a), what is the consumer and the producer surplus?

Consumer surplus is the difference between the maximum price that consumers are willing to
pay for a good and the actual price they pay. Producer surplus is the difference between the
minimum price that producers are willing to sell a good for and the actual price they receive.

At the equilibrium price of 2/103, the consumer surplus is equal to the area above the demand
curve and below the equilibrium price, from 0 units to 18/103 units. The producer surplus is
Mario Caseiro Martinez

equal to the area above the equilibrium price and below the supply curve, from 0 units to 18/103
units.

To calculate these areas, we can use the following formulas:

● Consumer surplus = (1/2) * (D(p0) - p0) * Q0


● Producer surplus = (1/2) * (p0 - S(p0)) * Q0

Where:

● p0 is the equilibrium price


● Q0 is the equilibrium quantity

Substituting the values for p0 and Q0, we get:

● Consumer surplus = (1/2) * (105(2/103) - 2/103) * (18/103) = 18/103


● Producer surplus = (1/2) * (2/103 - 2) * (18/103) = 0

c) To show this graphically, we can shift the original supply curve upward by the amount of the
tax. The new supply curve will intersect the demand curve at a new equilibrium point.

The new equilibrium price will be lower than the original equilibrium price. This is because the
tax reduces the incentive for producers to supply goods. The new equilibrium quantity will also
be lower than the original equilibrium quantity. This is because the tax increases the price that
consumers have to pay for goods, which reduces their demand.

To calculate the new equilibrium price, we can set the new supply, S'(p), equal to the demand,
D(p):

Unset
S'(p) = S(p) - t

Substituting the given functions for S(p) and D(p), we get:

Unset
2 + 8p - t = 105p

Solving for p, we get:


Mario Caseiro Martinez

Unset
p = (2 + t) / 103

Assuming the tax is t = 1, the new equilibrium price is:

Unset
p = (2 + 1) / 103 = 3/103

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