Econ 302

Homework #3

McLeod

Due in class Wednesday October 23rd.

Name !D # !nstructions" #lease $ead %are&ully
#lease 'rint out t(is &orm. )(ere s(ould be &our se'arate s(eets o& 'a'er *includin+ t(e co,er s(eet-. .&ter you (a,e written your answers/ 'lease sta'le t(e &our s(eets to+et(er at t(e to' le&t0 (and corner. The first sheet is intended only as a cover sheet. Do not write anything on the first sheet except your name and ID #. #lease answer eac( 1uestion on t(e 'a+e 'ro,ided. !& you need e2tra s'ace/ you may use t(e back o& t(e s(eet. )(ere are 30 'ossible 'oints on t(is (omework assi+nment. 4ou may work to+et(er/ but you M56) W$!)E 5# 4O5$ OWN WO$7 and )5$N !) !N/ !N #E$6ON/ .) )HE 8E9!NN!N9 O: %L.66 on Wednesday/ October 23rd. Late (omework will not be acce'ted.

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1. (20 points !uppose honey is produced in a "eehive using "ees and sugar. #ach honey producer uses one "eehive which she rents for $20%month. &roducing ' gallons of honey in one month re'uires spending (' dollars "ees) and ('2 dollars on sugar. a (* points +hat is the total cost of producing ' units of honey for an individual honey producer in a given month,

" (* points +hat is the average cost of producing ' units of honey per month for an individual producer for a given month,

c (* points In general) if the total cost of producing honey is a - "' - c' 2) then the marginal cost of producing honey is " - 2c'. .ssuming each honey producer operates as a price/ta0er) what is the monthly supply curve for an individual producer,

d (* points 1et 2 "e the total mar0et supply) and ' is the supply of an individual firm. Therefore) ' 3 2%n where n is the total num"er of firms in the mar0et. !uppose the demand for honey is given "y 2 3 2*(/(&. .lso) suppose there are 40 honey producers in the mar0et. +hat is the e'uili"rium price of honey,

f (* points 5ow much profit does an individual producer ma0e in a month, Is this a long/run e'uili"rium, If the answer is yes) simply state that it is a long/run e'uili"rium. If the answer is no) explain whether or not the e'uili"rium price will rise or fall.

2. (16 points !uppose a firm7s production function is given "y 2 3 1 1%2891%2. The :arginal &roduct of 1a"or and the :arginal &roduct of ;apital are given "y< :&1 3

K 1% 2 L1 % 2 ) and :& . 9 3 2 L1 % 2 2K 1% 2

a !uppose the price of la"or is w 3 2*) and the price of capital is r 3 4. Derive the firm7s total cost function.

" +hat is the firm7s marginal cost,

c =or this pro"lem) you will s0etch the graph of the firm7s iso'uant for 2 3 20 units of output) and on the same graph s0etch the firm7s isocost line associated with the total cost of producing 2 3 20 units of output. To get this total cost) you must use the Total ;ost function from part a . &lease scale your graph up to 100 units of 1a"or on the hori>ontal axis) and 100 units of ;apital on the vertical axis (do not go a"ove 100 units on either axis . =or the isocost line) clearly identify the vertical and hori>ontal intercepts. =or the iso'uant) clearly identify 6 com"inations of 1a"or and ;apital that will produce 2 3 20 (including the "undle that minimi>es the firm7s cost of production . :a0e sure your graph is neatly and accurately drawn and carefully la"eled.

(. (? points !uppose the Demand for "ase"alls is given "y 2 3 200 @ A&. a +hat is the price elasticity of demand when & 3 4,

" .t what price will Total Bevenue "e maximi>ed,

c +hat is the firm7s :arginal Bevenue when the price is $10,

*. (4 points !uppose there are n identical firms in a mar0et. #ach firm7s cost function is given "y ; 3 2*0- 16'2) where ' is the amount that an individual firm produces. This means that an individual firm7s marginal cost is given "y :; 3 (0'. .lso) the mar0et demand is given "y & 3 60* @ A2) where 2 is the total amount of the good produced "y all of the firms com"ined. Therefore) 2 3 n8'.

a 5ow much output will each of them produce,

" +hat will "e the mar0et price,

c 5ow many firms will there "e in long run e'uili"rium,