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Prof. D.W. Katzner

Economics 203
Problem Set VII
Think of a perfectly competitive firm which produces output x using inputs and
k. In the diagram below, the curve through points A = (4,9), B = (3,6), C = (4,3), and E =
(7,2) is the isoquant for output x0, and the straight line through C and D = (5,2) has slope
equal to the negative of the ratio of the price of (written p) and the price of k (written
pk):
k
A

3
2

x0
D

1. Which, if any, of points A, B, C, D, or E

a. is associated with MPl ( l) = 0 ? Why?
b. is associated with MPk ( k ) = 0 ? Why?
c. lies on the lower ridge line? Why?
d. lies on the upper ridge line? Why?
2. In the long run would the firm ever produce x0 at point A? Why or why not?
3. In the short run would the firm ever produce x0 at point A? Why or why not?
4. Which, if any, of points A, B, C, D, or E lies on the firm's expansion path?
Why?
5. Using the above diagram, calculate the long-run total cost of producing x0 when
p = 1 and pk = 1.

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6. With k fixed at k = 2 in the above diagram, calculate the short-run total cost of
producing x0 when p = 1 and pk = 1.
7. What conditions, if any, will ensure that the short-run total cost of producing x0
is the same as the long-run total cost of producing that output?