ECN 303 Practice Problem Solutions for Ch.

4. a. Labor’s MPL is dQ/dL = 1 - L/400. Setting MRPL = wage implies

40 - .1L = 20, or L* = 200.
In turn, Q = 150 and  = 2,000.

c. The 25% increase in productivity implies:

Q=1.25(L – L2/800)
MPL = (1.25)(1 – L/400).
Setting MRPL (at P = $50) equal to the unchanged wage implies:
62.5 - .15625L = 20.
Thus, L* = 272 and Q = 224.4.
Profit=$5,780.

13. a. For N1 = 16 and N2 = 24, the average catch at the first lake is Q1/N1 = [(10)(16) - .1(16)2]/16
= 8.4 fish, and the average catch at the second lake is Q2/N2 = [(16)(24) - .4(24)2]/24 = 6.4
fish, respectively. Lured by the greater average catch, some number of fishers will leave the
second lake for the first.

b. Movement between lakes will cease when all individuals obtain the same average catch.
Equating the average catches at the lakes implies 10 - .1N1 = 16 - .4N2. In addition, N1 + N2
= 40. Solving these two equations simultaneously implies N1 = 20 and N2 = 20. The total
catch at the two lakes is 320 fish.

c. To maximize total catch subject to N1 + N2 = 40, the commissioner should set MQ1 =
dQ1/dN1 = 10 - .2N1 equal to MQ2 = dQ2/dN2 = 16 - .8N2. We find that N1 = 26 and N2 =
14. The maximum total catch is 338 fish.

Cobb-Douglas Production Function Problem

a. Q=426.

b. MPL at K=5 is 95L-0.5

MPK at L=5 is 89K-0.6

c. Yes, the production exhibits diminishing marginal returns to both labor and capital.

d. MRPL=MR*MPL=MCL
MR=$25, MCL=PL=$10, MPL=95L-0.5
25(95L-0.5) = 10
L=56,406

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e. Decreasing returns to scale because
100(1)0.5(1)0.4=100
100(2)0.5(2)0.4=187 (%increase in input greater than %increase in output)
Or, 0.5+0.4=0.9<1 (Cobb-Douglas Rule)

f. The table of L, K and MRTSLK.

L K MRTSLK

1 32 40

2 13.5 8.4

3 8.1 3.4

4 5.7 1.8

5 4.3 1.1

h. TC=10L+20K=$500.
Vertical intercept=25
Horizontal intercept=50
Slope= -0.5

i. MPL/ PL =MPK /PK

50L-0.5 K0.4 /10=40L0.5 K -0.6 /20, which leads to L=2.5K

$500=25K+20K (substitute for L)

K=11.1
L=27.8
Q=1,381.

j. MPL/ PL =MPK /PK

50L-0.5 K0.4 /10=40L0.5 K -0.6 /20, which leads to L=2.5K

1000=100(2.5K) 0.5 K0.4

K=7.8, L=19.5
TC = (10)(19.5)+(20)(7.8)=351.