Microeconomics Summer Term 2018

Problem Set 10 Prof. Ingo Geishecker & Wadim Djatschenko

Problem 1) Average Costs and Marginal Costs

@c(w1 ,w2 ,y)
Explain and prove the following statement: The marginal cost curve M C = @y passes
c(w1 ,w2 ,y)
through the minimum point of the average cost curve AC = y .

Problem 2) Average Costs, Marginal Costs and Cost Minimization

Consider a firm with the production function y = f (x1 , x2 ) = (x1 x2 )1/4 . The input factor prices
are w1 = 12 und w2 = 3 and the firm faces fixed costs CF = 4800 that are independent of the
level of output.

(1) Compute the conditional demand functions x⇤1 (y) and x⇤2 (y) and the cost function c(y) for
the production of y units of output at the given input factor prices. What are the concrete
input factor amounts for the production of y = 40 units of output? What are the costs?

(2) Compute and sketch the AC- and MC-curves. Where does the AC-curve reach its minimum?

(3) The output shall be reduced to y = 20. In the short run the amount of input factor 2 cannot
be changed. Compute the short run total cost function and the short run AC-function. What
are the new costs? Where does the AC-curve reach its minimum now?

Problem 3) Short Run and Long Run Costs

A firm produces its output according to the production function y = f (k, l) = (k · l)1/2 where
k is the tangible factor (capital) and l is the amount of working hours (labour) used. The input
prices are wk = wl = 1. The factor k is fixed in the short run.

y2
(1) Show that the short run total cost function (STC) is Cs (k, y) = k + k.

(2) Compute the long run total cost function. Does the technology have increasing, constant or
decreasing returns to scale?

page 1 of 1