Chapter 6 Problems

1. Tickle Me Billy Inc., a manufacturer of presidential "look-a-like"

dolls, has the following production function:
Q = 20L - L2 + 12K - .5K2
Additionally, the companys input costs are PL = $2 and PK = $4.

a. What is the companys marginal product of labor (MPL) and

marginal product of capital (MPK)?
MPL = Q/ L = 20 - 2L
MPK = Q/ K = 12 - K

b. Does the companys production function exhibit diminishing

returns to each input?
Yes. Both marginal products decline, and as a result, returns are
diminished.

c. In the range 0 to 10 units, if both inputs can be purchased at

the same price per unit, will production be relatively labor
intensive or capital intensive?
Labor intensive. For L = K , the marginal product of labor is greater than the
marginal product of capital. Thus, at the same input prices, the company will
use more labor than capital.

d. Using the companys given input costs (PL = $2 and PK = $4),

what is the optimal combination of capital and labor?
MPL/PL = MPK/PK
(20 - 2L)/2 = (12 - K)/4
10- L = 3 - .25K
10 + .25K = 3 + L
L = .25K + 7

e. What input mix satifies the optimal combination of capital

and labor?
L = .25K + 7
Set L = 8, thus:
8 = .25K + 7
.25K = 1
K=4

f. What is the resulting output using this input mix?

When L = 8 and K = 4,
Q = 20(8) - (8)2 + 12(4) - .5(4)2
Q = 160 - 64 + 48 - 8
Q = 136

g. What is the companys total input cost using this mix?

When L = 8 and K = 4,
TC = ($2)(8) + ($4)(4)
TC = $16 + $16
TC = $32

Conclusion:

The minimum cost of producing 136 dolls is $32 using 8 units of labor and 4 units

of capital.

2. Manager Bob at Bobs Better Beanies and More figures he wants to buy
between 10 and 25 new patterns for his Bobby Beanie line of products.
PL=$10, PK=$30
a. Using the production function Q=20L0.8 K0.2, if Bobs goal is produce
1000 Beanies, how many workers can Bob hire if he buys 10, 15, or 25
patterns?

1000=20L0.8 K0.2
L=[(50)/(K.2)]1.25
Using this equation, plug in the values of K to find L: K L
(K,L): 10,75; 15,68; 25,60
b.Which combination of labor and capital is the most cost efficient using
the values of K and L from question 1?

TC=PL + PKK
at K=10, TC=10(75)+30(10)= $1050 **most cost efficient
at K=15, TC=10(68)+30(15)= $1130
at K=25, TC=10(60)+30(25)= $1350

c. Graph the production isocost and isoquant lines if Bobs budget

=$2000 and Q=1000.
TC=PLL + PKK
K=(TC/PK)-( PL/PK)L
K=(2000/30)-(10/30)L
K=66.67-.33L

d.Find MRTSLK

MRTSLK=( Q/ L)/( Q/ K)= [.8(20)L-0.2K0.2]/[.2(20)L0.8K-.8]= 4K/L

e.What is the lowest total cost Bob can have if he makes 1000 Bobby
Beanies?

Set the slope of the isoquant (MRTSLK) to the slope of the isocost.
(PL/PK).
MRTSLK =PL /PK
4K/L=.33
L=12.12K
Q=20L0.8 K0.2
1000=20(12.12K).8 K.2
K=6.79
L= 12.12K= 82.35
PL =10(82.35)= $823.50
PK =30(6.79)= $203.70
TC=203.70+823.50= $1027.20
f.What is the maximum number of Bobby Beanies Bob can produce
with a budget of $2000?
TC=PLL + PKK
2000=10(4K)+30K
K=28.57
L=4K= 114.29
Q=20(114.29)0.8(28.57)0.2
Q=1732 Bobby Beanies

g.Because of the unusually hot market for this fad item, will Bob follow
a cost minimization or an output maximization method to produce his
Bobby Beanies?

Because the demand for fad items is typically short-lived, Bob will
most likely follow the output maximization method in an attempt to
meet the current market demand for Bobby Beanies.

3. Carpenters Knock-Off Golf manufacturers exact replications of the

most popular name brand golf clubs. The following equation is their
production function:
10L.4K.6
Where K represents inputs of capital (including robotic machines), and L
represents inputs of labor. Using this Production Function, answer the
following questions.
a.Does Carpenters Production Function represent increasing,
decreasing, or constant returns to scale?
Constant Returns To Scale
b. Determine Carpenters equations for MPL & APL . (K=500)

MPL = Q/ L
= 4K.6/L.6
= 166.51/L.6

APL = Q/L
= 10K.6/L.6
= 10(41.63)/L.6

= 416.27/L.6
c. Is Carpenters Productions Function consistent with the Law of
Diminishing Returns (K=500)?

Yes, based on the following table MPL decreases as the input of labor
increases.

APL

MPL(Q/ L Q/L
)

0
0
0
1 416.27 416.27
2 549.27 274.00
3 645.99 215.33

0
416.27
133.00
96.72

166.51
109.90
86.00

d. Fixing K at 500, and variable amounts of labor, determine the

optimal amounts of labor, if labor costs $20/unit and price for the
golf clubs is $50.

MRPL = MCL; MRPL= MPL(P) and MCL= $20

166.51/L.6 (50) = $20

8326/L.6 = $20
20L.6 = 8326
L.6 = 416
L = 23,187
e.Find the MRTSLK, when K=500 and L=50.

MRTSLK = MPL/MPK

MPL = 4K.6L-.6, MPK = 6L.4K-.4

= 4K.6L-.6/6L.4K-.4
= .6667K/L
= .6667(500/50)
= 6.667

f. Determine the slope of the budget line when the budget is set at
$5,000, PL = $20/hr, PK = $10/hr.
TC = (PLL) + (PKK)
K = TC/PK PL/PK(L)
K = 5000/10 (20/10)L
K = 500 2L
Slope = -2

-If the budget is increased to $6,000, what will be the new slope?

Answer: K = 6000/10 (20/10)L

K = 600 2L
Slope = -2
Slope does not change with a budget increase, the line shifts to the
right.

g.If the budget is set at $ 5,000, what is Carpenters maximum

level of output? (PL = 20, PK = 10)

Answer: MPL/MPK = PL/PK

.667(K/L) = 20/10
K/L = 3
3L = K
L = .333K
TC = PLL + PKK
5000= 20(.333K) + 10(K)
5000= 6.666K +10K
16.66K= 5000
K= 300
L= 100
Q = 10 L.4K.6
Q = 10(100).4 (300).6
Q= 1,933

h.If Carpenters decides to limit the output of the golf clubs to

1200 units, what is their total costs?
Q = 10L.4K.6
1200 = 10(.333K).4K.6
1200 = 10 *.333.4 K.4K.6

120 = .644K
K = 186, L = 62
TC = (PLL) + (PKK)
TC = 20(62) + 10 (186)
TC = 1240 + 1860
TC = $3,100

i. What is Carpenters likely to do if the cost of labor is

increasing compared to the cost of a new high-tech ultra
efficient robot that has just been purchased?
They would substitute more capital for labor.

4. The Production Function for the Midget Widget Manufacturing

Company is: Q = 50 L .3 K .4

a. What is the Marginal Product of Labor equation for Midget Widget?

MPL = .3 (50) L .3-1 K .4 = 15 L -.7 K .4

b. If K is fixed at 32, what is the Average Product of Labor?

APL = Q/L = 50 L -.7 (32) .4 = 200 L -.7

c. If the Price of a unit of output is $20, what is the Marginal Revenue

Product of Labor?

MRPL = MPL * P = 15 L -.7 (20) .4 * $20 = 994.34 L -.7

d. If the Cost of a unit of labor is $100, what would be the optimum

amount of labor and output?

Let MRPL = MCL;

994.34 L -.7 = 100

L -.7 = .100
L = 26.6
Q = 50 (26.6).3 * (20) .4 = 443.45

e. What type of Returns to Scale does Midget Widget exhibit?

Adding the exponents, .3 + .4 = .7 < 1.0

Therefore, it exhibits decreasing returns to scale

f. Describe the firm's long-run average cost curve (related to Chap. 7).

With (substantial) decreasing returns to scale, the firm

experiences (substantial) diseconomies of scale.

4. A wheel manufacturer produces a single product but has the capability of

using 2 different plants. Total demand for the product is equal to 10,000
units. The corporation uses aluminum to manufacture the wheels
key equations
Q=Q(a)+Q(b)
M(a)+M(b)=10,000

~2=denotes square

Production Functions
Plant A Q(a)=15-m(a)-.5M~2(a)
Plant B Q(b)=11M(b)-M~2(b)

a. What is the marginal product for wheel output? -in thousands of units
Plant A MP(a)=15-M(a)
Plant B MP(b)=11-2M(b)

b. Should they each produce 5,000 units? NO-They are not optimizing
marginal products.

c. Draw the declining marginal product curve for each plant.

-see attached

d. Solve algebraically for optimal output at each plant

M(a)+M(b)=10
15-M(a)=11-2M(b)
M(a)=10-M(b)
M(b)=2
M(a)=8

Plant A should produce 8 thousand units and Plant B should produce 2,000.

7. Suppose a firm has the following production function:

Q = 20L - L2 + 48K - 2K2

a) Assuming capital is constant with a value of 10 units, what is the

marginal product of labor?

MPL = 20 - 2L

b) With this scenario, what would be the greatest total output the firm
can achieve?

Set MPL=0 and solve: L=10 and Q=380

c) The firm can get $3 for each additional unit sold. Suppose it costs
the firm $15/hour for each additional worker. What is the optimum
amount of labor ?

Set MRPL=MCL. L=7.5

d) What is the firm's operating profit?

 = 1009.50

e) Describe the Returns to Scale for this problem.

With L=5 and K=5, Q=265; with L=10 and K=10, Q=380.
Thus a doubling of each input does not double the output. Th
production function has decreasing returns to scale (over this
range of inputs).

8. A dirty Politician has just received word that the police are on their
way to arrest him. Therefore, he must destroy the files that will be used
as evidence in a trial. The politician has two shredding machines at his
disposal. The relationship between the amount of files to be destroyed
and the amount of time it will take the shredders is as follows:

D1=14+36T1-0.5T12 and D2=10+120T2-3T22

Where, D=destroyed files and T=time (in minutes)

a. Determine the maximum number of files that can be destroyed with each
machine (before it breaks down).
Set the 1st derivatives equal to zero and solve: D 1 = 662 and D2 = 1210.
b. If the politician has 500 files to destroy the files, determine the minimum
time it will take to shred them?
To minimize time using both machines, the work should stop at the same
time; otherwise there is a misallocation. Thus let T1=T2=T and set
D1+D2=500. Solving a quadratic for T results in 2 solutions (41.3 and 3.3).
Select the smaller value of 3.3 minutes and allocate about 128 files to
machine 1 and 372 to machine 2.