ECON 211 S2 (Fall 2016)

Solutions Quiz 3
MULTIPLE CHOICE
1. Suppose a single-input production function has initially increasing but eventually
decreasing marginal product. In this case, the first order condition for the profit
maximization problem
a. is necessary for identifying the profit maximizing production plan.
b. is sufficient for identifying the profit maximizing production plan.
c. is both necessary and sufficient for identifying the profit maximizing
production plan.
d. is neither necessary nor sufficient for identifying the profit
maximizing production plan.
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2. Suppose that, at a given production plan, the marginal product of labor is 6 and
the marginal product of capital is 3. In a graph with labor on the horizontal and
capital on the vertical axis, this implies that the technical rate of substitution at that
production plan is
a. -1/2 c. -18
b. -2 d. None of the above.
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3. A conditional input (labour and capital) demand functions are drawn for a certain
level of output. To derive the unconditional input demand functions which of the
following steps are needed
a. Set price equals marginal cost to derive the output function of prices, wages and
rental rates.
b. Substitute output as a function of price, wage and rental rate into conditional
demand functions.
c. Both a. and b.
d. None of the above.
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4. Which of the following assumptions is NOT necessary for the Strong Axiom of
Revealed Preferences to be satisfied
a. There is a unique choice bundle at all prices.
b. Consumer preferences are stable.
c. Consumer income is constant.
d. All of the above.
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Answer whether each of the following statements is TRUE OR FALSE.
1. There is a compensated demand (or MWTP) curve for every indifference curve
just as there is an uncompensated demand curve for every income level -- TRUE
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2. An increase in income causes compensated demand curves to shift inward and
regular demand curves to shift outward. --FALSE
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3. In the one-input model of production, increasing marginal product implies non-

convexity of the producer choice set. --TRUE
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4. The output level is constant along any isoprofit line. --FALSE

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5. Just as indifference maps represent consumer tastes, so isoquant maps represent

a producer tastes.
--FALSE
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6. If the Strong Axiom of Revealed Preferences is satisfied, then the Weak Axiom of
Revealed Preferences also holds. --TRUE
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PROBLEMS

1. Suppose a technology is described by a single input production function f (l) .

a. For a price taking producer who faces output price p and wage w, derive the first
order condition of the profit maximization problem and interpret it.
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Max =pxwl such that x=f (l)

= p(f (l))wl

d /dl =p . d f (l)/ dl w=0

d f (l)/dl=w/ p

MPL=w/ p

pMPL=w

MRP=w

The producers maximize profits when the marginal cost of hiring an extra
unit of labour, that is the wage, is equal to the marginal benefit or the
increase in revenue earned by the last unit hired.

b. Without knowing more about the function f, is the condition you derived in (a)
either necessary or sufficient for deriving the profit maximizing production plan?
Explain.
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It is neither necessary nor sufficient. The condition is necessary and
sufficient only if we know that the solution is an interior solution and that
there are no local minima that lead to multiple tangencies between
isoprofits and the production frontier.
2. Suppose that producers combine capital and labour to produce an input
according to the production technology, f ( k , l )= ln ( l)+ ln ( k ) . Derive the first
order conditions of the producers profit maximization problem, and solve for labour
and capital demand given prices p, w and r.
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=P(f ( k ,l))wlrk

=P(ln(l)+ ln(k ))wlrk

d /dl =p ( /l)w=0

d /dk = p( /k )r =0

From FOC 1 l=(P / w)

From FOC 2 K=P /r

l( p , w , r )
d. Suppose > 0 for the labour demand function that you found above.
w
Can this be the correct labor demand function? Explain.
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No, since it implies as wage rises labor employed increases as well,
holding everything else constant