Vrije Universiteit Amsterdam

Intermediate Microeconomics

Problem Set 2

To be uploaded on Canvas by Friday 16-09-2022 9 AM by the team-leader in Excel format.

Teams that are unable to collaborate together get zero points. Sort it out!

Q1 (2 points) The global disruption of supply chains by Covid-19 caused a shortage of computer chips
forcing car manufacturing to scale down production. This strongly suggests that the elasticity of substitution
between computer chips and labor in car manufacturing is very close to
(a) 0
(b) 1
(c) in…nity
(d) impossible to say, could be any positive number

Q2 (2 points) Higher temperatures due to global warming have led to increased spoilage or reduced harvests
in agricultural production, f.e. co¤ee and grapes for wine. The reduced net produce is t 100%, 0 < t < 1, of
production before global warming. It means that the production function has become t f (k; l). Given the
old RTS, the new rate of technical substitution is given by
(a) t RT S
(b) RT S
(c) RT S=t
(d) None of the above answers

Q3 (2 points) As in Q1, the production function has become t f (k; l), where 0 < t < 1. If C (v; w; q) is the
cost function corresponding to production function f , then the adjusted cost function to produce q0 > 0 is
given by
(a) C (v; w; tq0 )
(b) t C (v; w; q0 )
(c) C (v; w; q0 ) =t
(d) C (v; w; q0 =t)
p p
Q4 (5 points) Suppose the production utility is given by f (k; l) = k+ l and input prices v; w > 0. The
c
contingent demand function for labor l (v; w; q0 ) is given by
v
(a) q0 v+w .
w
(b) q0 v+w .
2
v
(c) q02 (v+w)2.
2
w
(d) q02 (v+w)2.

1
 4
Q5 (5 points) A price-taking pro…t-maximizing producer has cost function C(v; w; q) = cq 3 . The pro…t-
maximizing production q (p; c) and the maximal pro…t (p; c) are given by:
2 3
9 p 9 p
(a) q (p; c) = 16 c2 and (p; c) = 64 c2 .
16 c2 64 c3
(b) q (p; c) = 9 p2 and (p; c) = 9 p2 .
3 4
27 p 27 p
(c) q (p; c) = 64 c3 and (p; c) = 256 c3 .
64 c3 256 c4
(d) q (p; c) = 27 p3 and (p; c) = 27 p3 .

p4
Q6 (5 points) Consider the pro…t function (p; v; w) = 12 3 3 . The suply function and the contingent
v2 w2
demand function for capital are given by:
p4 p3
(a) q (p; v; w) = 18 5 3 and k c (p; v; w) = 48 3 3 .
v2 w2 v2w2
3
p p4
(b) q (p; v; w) = 48 3 3 and k c (p; v; w) = 18 5 3 .
v2w2 v2w2
p3 c p4
(c) q (p; v; w) = 48 3 3 and k (p; v; w) = 18 3 5 .
v2w2 v2w2
p4 p3
(d) q (p; v; w) = 18 3 5 and k c (p; v; w) = 48 3 3 .
v2w2 v2w2

Q7 (5 points) iLoveBells is a Dutch horticultural farm who grows bell peppers in greenhouses using labor
and energy for light and heat. We ignore the capital cost of greenhouses. Energy is denoted as e and the
p
price of energy is pe . Consider the cost function C (w; pe ; q) = 18 q 2 wpe , the (pro…t maximizing) demand
2
function e (P; w; pe ) = pP and the supply function q (P; w; pe ) = p4P . The substitution e¤ect for the
wpe wpe
energy demand for a marginal increase in the price of energy is given by .
p
1 2 pw
(a) 16 q p .
pe
1 2 pw
(b) 32 q pe pe .
1p p P2
(c) 2 w pe pe .
3p p P2
(d) 4 w pe p2e .

p10
Q8 (2 points) For what value of is the function v w6
a pro…t function (p; v; w)?
(a) 7.
(b) 5.
(c) 3.
(d) 1.

1
Q9 (2 points) Suppose the producer has cost function 2cq 2 (Hint: is this (dis)economies of scale?), the pro…t
maximizing quantity is given by
(a) 0
p
(b) c
p2
(c) c2
(d) does not exist.