Part a

1 1
If production function exhibits increasing returns to scale then F(2K, 2L) > 2L3 K 3
1 1
If production function exhibits decreasing returns to scale then F(2K, 2L) < 2L3 K 3
1 1
If production function exhibits constant returns to scale then F(2K, 2L) = 2L3 K 3
1 1 1 2 1
F(2K, 2L) = (2L)3 (2K)3 = (LK)3 23 < 2 (LK)3 so it exhibits decreasing returns to scale

Part c
Total Cost = wL + rK
MPL w
At equilibirum, = − (1)
MPk r
1 1 1
∂F(K, L) ∂ (K 3 L3 ) 1 K 3
MPL = = =3 2 − (2)
∂L ∂L
L3
1 1 1
∂F(K, L) ∂ (K 3 L3 ) 1 L3
MPK = = =3 2 − (3)
∂K ∂K
K3
Put (2) and (3) in (1)
1 13
3K
2
L3 = w
1 13 r
3L
2
K3
K w
=
L r
w
K = L − (4)
r
1 1
y = L3 K 3
1
1 w 3
y= L3 ( L)
r
1
w 3 2
y = ( ) L3
r
1
2 r 3
L3 = y ( )
w
 1
3 r 2
L= y2 ( ) − (5)
w
Put (5) in (4)
1 1
w w 3 r 2 w 2 3
K = ( ) L = ( ) y2 ( ) = ( ) y2
r r w r
1 1
3 r 2 w 2 3 1 3 1 3 1 3
Total cost = wL + rK = wy 2 ( ) + r ( ) y 2 = (rw)2 y 2 + (rw)2 y 2 = 2 (rw)2 y 2
w r
As w = 2 and r = 1
3
Total Cost = 2√2 y 2
Total Cost 1 1
Average cost = = 2(rw)2 y 2
y
1
Average Cost = 2√2 y2
Average cost is directly proportional to y so as y increases average cost increases
∂(Total Cost) 1 1
( )
1
Marginal Cost = = 3(rw)2 y 2 = 3√2 y 2
∂y
Marginal cost is higher than Average Cost
Part b
3 3
Total Cost = 2√2 y 2 = 2√2 (32)2 = 512
Part d
2 1
If production function exhibits increasing returns to scale then F(2K, 2L) > 2L3 K 3
2 1
If production function exhibits decreasing returns to scale then F(2K, 2L) < 2L3 K 3
2 1
If production function exhibits constant returns to scale then F(2K, 2L) = 2L3 K 3
2 1 2 1 3
F(2K, 2L) = (2L)3 (2K)3 = (L)3 K 3 23 so it exhibits Constant returns to scale
Part e
Total Cost = wL + rK
MPL w
At equilibirum, = − (7)
MPk r
1 2
∂ (K 3 L3 ) 2 13
∂F(K, L) K
MPL = = =3 1 − (8)
∂L ∂L
L3
1 2
∂ (K 3 L3 ) 1 23
∂F(K, L) L
MPK = = =3 2 − (9)
∂K ∂K
K3
Put (9) and (8) in (7)
2 13
3K
1
L3 = w
1 23 r
3L
2
K3
2K w
=
L r
w
K = L − (10)
2r
 2 1
y = L3 K 3
1
2 w 3
y= L3 ( L)
2r
1
w 3
y=( ) L
2r
1
2r 3
L = y ( ) − (11)
w

Put (11) in (10)

1 2
w w 2r 3 w 3
K = ( )L = ( ) y ( ) = ( ) y
2r 2r w 2r
1 2
2r 3 w 3
Total cost = wL + rK = wy ( ) + r ( ) y =
w 2r
As w = 2 and r = 1
Total Cost = 2 y + y = 3y
Total Cost 3y
Average cost = = =3
y y
Average Cost = 3
Average Cost is independent of y. So increase in y doesnot affect average cost
∂(Total Cost)
Marginal Cost = = 3
∂y
Marginal cost is same as Average Cost
Part f
2 2
If production function exhibits increasing returns to scale then F(2K, 2L) > 2L3 K 3
2 2
If production function exhibits decreasing returns to scale then F(2K, 2L) < 2L3 K 3
2 2
If production function exhibits constant returns to scale then F(2K, 2L) = 2L3 K 3
2 2 2 2 4 2 2
F(2K, 2L) = (2L)3 (2K)3 = (L)3 K 3 23 > (L)3 K 3 2 so it exhibits increasing returns to scale
Part e
Total Cost = wL + rK
MPL w
At equilibirum, = − (12)
MPk r
2 2
∂ (K 3 L3 ) 2 23
∂F(K, L) K
MPL = = =3 1 − (13)
∂L ∂L
L3
2 2
∂ (K 3 L3 ) 2 23
∂F(K, L) L
MPK = = =3 1 − (14)
∂K ∂K
K3
Put (14) and (13) in (12)
2 23
3K
1
L3 = w
2 23 r
3L
1
K3
K w
=
L r
w
K = L − (10)
r
2 2
y = L3 K 3
2
2 w 3
y= L3 ( L)
r
2
w 3 4
y = ( ) L3
r
1
3 r 2
L = y 4 ( ) − (11)
w

Put (11) in (10)

1 1
w w 3 r 2 w 2 3
K = ( ) L = ( ) y4 ( ) = ( ) y4
r r w r
1 1
3 r 2 w 2 3
Total cost = wL + rK = wy ( ) + r ( ) y 4
4
w r
As w = 2 and r = 1
2 3 3 3
Total Cost = y 4 + √2 y 4 = 2√2 y 4
√2
3
Total Cost 2√2 y 4 2√2
Average cost = = = 1
y y
y4
Average Cost is inversely proportional to y so average cost decreases as y increases
∂(Total Cost) 3 1 3
Marginal Cost = = (2√2) ( ) y −4 = 1
∂y 4
√2 y 4
Marginal cost is lower than Average Cost
Part a
If production function exhibits increasing returns to scale then F(2S, 2L) > 2 F(S, L)
If production function exhibits decreasing returns to scale then F(2S, 2L) < 2 F(S, L)
If production function exhibits constant returns to scale then F(2S, 2L) = 2 F(S, L)
2L L
F(2S, 2L) = min { 2S, } = 2 min {2, } = 2 F(S, L) so it exhibits Constant returns to scale
4 4
Part b
Production function is of perfect complement form
L
In such a case optimally S =
4
L L L
Y = min { S, } = S = as S =
4 4 4
So, S = Y and L = 4Y
Total Cost = 5S + L = 5 (Y) + 4Y = 9Y
Total Cost 9Y
Average Cost = = =9
Y Y
∂(total Cost) ∂(9Y)
marginal Cost = = =9
∂Y ∂Y