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Problem Set 2 Solutions: Q L E L 1/4 2 L 1/4
Problem Set 2 Solutions: Q L E L 1/4 2 L 1/4
Problem Set 2 Solutions: Q L E L 1/4 2 L 1/4
1.
a) M RP = M R M P = 10 (12 2E) = 120 20E. So the
inverse demand curve is P = 120 20E.
b) E = 4.5 when P = 30.
c) E = 4.4 when P = 30 + and = 2.
d) In the long run we would expect factor demand to be more
elastic. Firms are likely to make investments in technology
that would make the firm less reliant on a single (volatile)
energy source.
2.
a) AP L =
q
L
b) M P L =
E 1/4
L
q
L
3
4
2
L1/4
E 1/4
L
c) M RT SL,E = FFEL = 3 E
L
c) The firms profit function is = L3/4 E 1/4 3LrE. Taking
the derivatives with respect to L and E gives us the two first
order conditions (FOCs),
1
4
L 3/4
E
=r
3
4
E 1/4
L
=3
L
80
70
60
50
40
30
20
C
A
10
0
10
20
30
40
50
60
70