Microeconomics 2012-2013 IBA

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Problem set 3: Chapters 6 to 8

Microeconomics 2012-2013 IBA

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CHAPTER 6: Inputs and production functions

By now, you should have finished Homework Week 5, Chapter 5 in WileyPlus.

Before making the exercises in this problem set, you should finish Homework Week 7,
Chapters 6 to 8 in WileyPlus.

Question 6.1
The Cobb-Douglas production function is defined as Q AK L with and > 0. Under
which conditions for and is this production function characterized by decreasing,
increasing and constant returns to scale?

Question 6.2
Let B be the number of bicycles produced from F bicycle frames and T tires. Every bicycle
needs exactly two tires and one frame.
a) Draw the isoquants for bicycle production.
b) Write the mathematical expression for the production function.
c) Write an expression that characterizes the corner points of this production function.

Question 6.3
Suppose a firms production function initially took the form Q = 500(L + 3K). However, as a
result of a manufacturing innovation, its production function is now Q = 1000(0.5L + 10K).
a) Show that the innovation has resulted in technological progress in the sense defined in the
text.
b) Is the technological progress neutral, labor saving, or capital saving?

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CHAPTER 7: Costs and cost minimization

Question 7.1
Consider the production function Q L K . With the price for labor w and the price for
capital r, derive the expressions for the input demand curves.

Question 7.2
To produce, a factory needs both laborers and capital. For every machine it buys, it needs 2
laborers to operate it so it can produce 10 units. A single laborer cannot do the job.
a) Draw the isoquants of the production of respectively 10, 20 and 30 units.
b) Assume that the price of a laborer is 7.5 and that the cost of capital equals 5. What is
the lowest total cost at which 20 units can be produced? Draw.
c) Interpret the cutpoint of the isocost function with the isoquant (Q=10).
d) Assume that the price of labor increase until 10. How does this change the optimal use of
labor and capital for a production of 20 units?
e) What is the implication in case the total budget is restricted to 40 euros at the new price
for labor of 10? Draw.

Question 7.3
Assume that the production function of a firm is given by Q = 12 F1/3M1/4, with M the use of
male labor hours and F the use of female labor hours. Assume furthermore that men earn
14/hour, while females earn 10/hour. At the moment, the firm employs 81 men hours and
64 women hours, to produce 144 units.
a) Write down the optimization problem of the firm.
b) Is the firm operating under cost minimization? If not, do there have to be more men or
more women employed?
c) Assume that the unions negotiate that that the wage of females has to be equalized to
those of men.
1. Determine the influence on the costs at the current employment schedule

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2. What is the impact on the demand for female working hours, starting from the
initial employment level?
d) Assume that the firm is able to maintain the original wage structure, but that, under the
pressure of the unions; it is now obliged to use as many men as women hours in the
production process.
1. To keep the same production level, how many labor hours need to be used?
2. To which extent will this influence the costs?

Question 7.4
Suppose the firm has three inputs to produce its output: capital K, labor L and materials M.
The firms production function is given by
1

Q K 3 L3 M 3 .

The prices of the inputs are respectively r = 1, w = 1 and m = 1.

a) What is the solution to the firms long run cost minimization problem given that the firm
wants to produce Q units of output?
b) What is the solution to the firms short-run cost minimization problem when the firm want
to produce Q units of output and capital is fixed at K ?
c) If capital is fixed at K = 4 in the short-run and we want to produce Q = 4, how do the
short-run and the long-run cost minimizing quantities of labor and materials compare?

Question 7.5
A manufacturing firms production function is Q = KL + K + L. Suppose that the price r of
capital services is equal to 1, and let w denote the price of labor services. If the firm is
required to produce 5 units of output, for what values of w would a cost-minimizing firm use
a) only labor?
b) only capital?
c) both labor and capital?

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CHAPTER 8: Cost curves

Question 8.1
A packaging firm relies on the production function Q = KL + K. Assume that the firms
optimal input combination is interior (strictly positive values for both inputs, that is K > 0 and
L > 0).
a) Derive the long-run total cost curve in terms of the input prices w and r.
b) What happens when the input prices double?

Question 8.2
Consider a production function of three inputs: labor, capital and material, given by Q=LKM.
Let w= 5, r = 1 and m = 2 be respectively the price of the inputs.
a) Suppose that the firm is required to produce Q units of output. Show how the costminimizing quantity of labor and materials depend on the quantity Q.
b) Find the equation of the firms long run total cost curve.
c) Find the equation of the firms long run average cost curve.
d) Suppose that the firm is required to produce Q units of output, but that its capital is fixed
at a quantity of 50 units. Show how the cost-minimizing quantity of labor and materials
depend on the quantity Q.
e) Find the equation of the firms short run total cost curve when capital is fixed at a quantity
of 50 units. How does this relate to the long run total cost function?
f) Find the equation of the firms short run average cost curve when capital is fixed at a
quantity of 50 units.

Question 8.3
Take the production function Q K L
a) Is this production process characterized by increasing returns to scale?
b) Derive the input demand functions for the two inputs.
1. Are the inputs normal?
2. Discuss how they depend on the prices of the own and the other input.

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c) Does the total cost function exhibit economies or diseconomies of scale? Proof this in at
least two ways.
d) Compare your conclusions on the scale elasticity of the production process and on the
output elasticity of the cost structure.

Question 8.4
Q2
.
K
Within the same set of axes, sketch a graph of the short-run average cost curves for three
different plant sizes: K = 10, K = 20, and K =30. Based on this graph, what is the shape of
the long-run average cost curve?
A producer of hard disk drives has a short run total cost curve given by STC (Q) K