SEM SR LR LANGRANGIAN

APR 2010 AQ4 BQ2 AQ2

APR 2011 AQ2, BQ3b BQ3a
JAN 2012 BQ3b BQ3 AQ4
JUN 2012 AQ2 BQ3a
JAN 2013 AQ5 BQ2 AQ4

APR 2010 AQ2

Media Services, Inc., is a centralized processor of promotional coupons for firms in the food
products industries. A key aspect of Media's operation is its sophisticated records division,
which monitors promotional and sales data in order to highlight effective promotions and limit
coupon fraud. A production function for coupons in the records division has been estimated as
fo|lows:
Q = -60 + 140L + 100K – 10L2 – 8K2 – 6LK
where Q = coupons processed (in units)
L = computer staff input (in labor-week)
K = minicomputer time input (in machine-week)
Furthermore, computer staff (L) earns an average income of RM20 per week, while the
average rental for the machine (K) (including software and service costs) is RM40 per week.
a) Derive the constraint function if the total expenses is limited to RM200 per week. (1 mark)
200 = 20L + 40K

b) Formulate the Lagrangian function and determine the optimal levels for L and K. (5 marks)
Q = -60 + 140L + 100K – 10L2 – 8K2 – 6LK – λ (20L + 40K – 200) (1m)
L’ = 140 – 20L – 6K – 20λ = 0 X 2 (0.5m)
L’ = 280 – 40L – 12K – 40λ = 0
K’ = 100 – 16K – 6L – 40λ = 0 (0.5m)
L’ – K’ = 180 – 34L + 4K = 0 (0.5m)
4K = 34L – 180
200 = 20L + 40K
200 = 20L + 10(4K) (0.5m)
200 = 20L + 10(34L – 180)
200 = 20L + 340L – 1800
200 + 1800 = 360L
L = 2000/360 = 5.55 (1m)
4K = 34(5.55) – 180 = 8.7
K = 8.7/4 = 2.175 (1m)

c) Calculate and interpret the Lagrangian multiplier. (2 marks)

20λ = 140 – 20L – 6K
20λ = 140 – 20(5.55) – 6(2.175)
λ = 15.95/20 = 0.7975
If total expenses increase by RM1, Q will increase by 0.7975 units
APR 2010 AQ4
The equation below represents a short run production function for Company XYZ.
Q = 2L + 0.5L2 – 0.025L3
Where Q = the number of output produced
L = the number of labor units employed.
a) Derive the function for average product of labor and marginal product of labor. (2 marks)
APL = 2 + 0.5L – 0.025L2
MPL = 2 + L – 0.075L2

b) At which unit of labor (L) does marginal returns begin to diminish? (2 marks)
MPL’ = 1 – 0.15L = 0
L = 1/0.15 = 6.67

c) If the product is sold at RM20 per unit and the wage rate is RM40 per unit of labor, how
many units of labor should be employed in order to maximize the firm's profit? (2 marks)
MPL x P = w
(2 + L – 0.075L2)(20) = 40
40 + 20L – 1.5L2 = 40
L(20 – 1.5L) = 0
L = 0, 13.33
L = 13.33

d) Is this production function showing decreasing, constant, or increasing returns to scale?

(2
marks)
If L = 1, Q = 2.475
If L = 2, Q = 5.8
∆Q = (5.8 – 2.475)/2.475 = 1.34
Since ∆Q > 1, increasing return to scale

APRIL 2010 BQ2

A production function of Su's Company is given below:
Q =10K0 8L0.2
where Q = total output,
K = units of capital and
L = units of labour.
Su's Company currently employs 40 units of capital and 200 units of labour. The per unit price
of capital and labour are RM100 and RM10 respectively.
a) Based on the current inputs used, find the total cost and calculate the level of output
produced by Su's Company. (4 marks)
TC = wL + rK = 10(200) + 100(40) = 6000
Q = 10(40)0 8(200)0.2 = 551.89

b) Calculate the marginal product of capital and marginal product of labour based on the
current inputs used. (4 marks)
MPL = 2K0.8L-0.8 = 2(40)0.8(200)-0.8 = 0.55
MPK = 8K-0.2L0.2 = 8(40)-0.2(200)0.2 = 11.04
c) Derive the equation for the expansion path. (4 marks)
MPL/MPK = w/r
2K0.8L-0.8 /8K-0.2L0.2 = 10/100
2K/8L = 0.1
K = 0.1(8L)/2 = 0.4L

d) With the current input usage, is Su's Company operating efficiently? (2 marks)
MPL/MPK = w/r
0.55/11.04 = 10/100
0.0498 ≠ 0.1
Not efficient

e) If the price of capital increases by 100%, will the current input mix be efficient? Explain.
(4
marks)
New r = 200
0.55/11.04 = 10/200
0.0498 = 0.05
Efficient

f) If capital increases by 5% and labour decreases by 10%, what would be the percentage
change in output produced? (2 marks)
K ↑ 5% ∴ Q = 0.8 x 5 = 4%
L ↓ 10% ∴ Q = 0.2 X (-10) = -2%
So Q ↑ by 2% only

APR 2011 AQ2

Given the following total production function (Q), where firm's capital is held as constant:
Q = 3L2 – 0.05L3
Where: Q = units of output
L = units of labour
a) Calculate the range of labour over Stage I, II and III of production. (5 marks)
APL = 3L – 0.05L 2

APL’ = 3 – 0.1L = 0 L = 30
MPL = 6L – 0.15L2 = L(6 – 0.15L) = 0 L = 6/0.15 = 40
Stage 1 : 0 < L < 30
Stage II : 30 < L < 40
Stage III: L > 40
b) Briefly explain the "Law of Diminishing Marginal Returns" and in which stage does it set in.
(3
marks)
DMR: If L increases at constant K, MPL will start to reduce. Happen in short run in
stage I
APR 2011 BQ3a
a) Erdin Company specializes in the production of computers. The company's production
function is:
Q = 200L0.25K0.65
Where Q = quantity of computers
L = labour input
K = capital input
The price of labour is RM50 per unit and capital is RM100 per unit. Their total cost is
RM5,000.
i) Derive the constraint and Lagrangian functions. (2 marks)
Constraint : 5000 = 50L + 100K
LQ = 200L0.25K0.65 – λ (50L + 100K – 5000)

ii) Determine the optimal combination of labour and capital, subject to the cost constraint
as above. (6 marks)
-0.75 0.65
MPL = 50L K – 50λ = 0 x 2
= 100L-0.75K0.65 – 100λ = 0
MPK = 130L0.25K-0.35 – 100λ = 0
100K = 130L
K = 1.3L
5000 = 50L + 100K
5000 = 50L + 100(1.3L)
5000 = 180L
L = 27.78
K = 1.3L = 36.114

iii) Calculate the value of the Lagrangian multiplier and interpret its meaning. (2 marks)
50λ = 50L-0.75K0.65
50λ = 50(27.78)-0.75(36.114)0.65
λ = 0.85
If cost increase by RM1, production increase by 0.85 unit

iv) At the optimum level of production, how much is the average cost of output? (2 marks)
Q = 200L0.25K0.65
Q = 200(27.78)0.25(36.114)0.65 = 4725.548
AC = TC/Q = 5000/4725.548 = 1.058

v) What is the percentage change in output if capital increases by 6% and at the same time
labour also increases by 4%? (2 marks)
6%(0.65) + 4%(0.25) = 4.9%
APR 2011 BQ3b
Consider the following short-run production function for Syarikat ALFAFA:
Q = 20L – 0.5L2
Where L = labour input
Q = output.
The price of labour is RM50 per day and the price of output is RM10 per unit.
i) How many units of labour should Syarikat ALFAFA employ to maximize profits? (3 marks)
MPL x P = w
(20 – L)(10) = 50
200 – 10L = 50
150 = 10L
L = 15

ii) How much is the total-profit earned by Syarikat ALFAFA per day? (3 marks)
π = TR – TC
Q = 20L – 0.5L2 = 20(15) – 0.5(15)2 = 187.5
TR = PQ = 10(187.5) = 1875
TC = wL = 50(15) = 750
π = 1875 – 750 = 1125

Jan 2012 AQ4

Syarikat Highlight produces two brands of torch lights which are Handy (H) and Superlight (Y).
The profit function (π) of Syarikat Highlight is given by
π = 80H - 2H2 - HY- 3Y2 + 100Y
However the firm faces a constraint that is the total output of Handy (H) and Superlight (Y) must
be 12.
a) Derive the constraint function and the Lagrangian multiplier equation. (2 marks)
Constraint function: 12 = H + Y
πL = 80H - 2H2 - HY- 3Y2 + 100Y + λ(12 – H – Y)

b) Determine the quantity of each brand of torch lights that will maximize profit. (4 marks)
H’ = 80 – 4H – Y – λ = 0
Y’ = -H – 6Y + 100 – λ = 0
H’ – Y’ = -20 – 3H + 5Y = 0
Know that H = 12 – Y
Substitute H = 12 – Y in -20 – 3H + 5Y
-20 – 3(12 – Y) + 5Y = 0
-20 – 36 + 3Y + 5Y = 0
8Y = 56 ∴ Y = 56/8 = 7
H = 12 – Y ∴ H = 12 – 7 = 5

c) Calculate the value of the lagrangian multiplier and interpret it. (2 marks)
λ = 80 – 4H – Y
λ = 80 – 4(5) – 7 = 53
when Q ↑ by 1 unit, π will increase by RM53
Jan 2012 BQ3a
Daya Tahan Sdn. Bhd. estimates the following production function for its semiconductor
products.
Q = 30K0.7L0.6
Where Q = the rate of output, K = the capital input & L = the labour input.
Input prices are RM50 for capital and RM20 for labour. The firm is currently using 100 units of
capital and 80 units of labour.
i) Calculate the total cost spent on inputs and the level of output produced by Daya Tahan.
(2
marks)
TC = wL +rK = 20(80) + 50(100) = 6600
Q = 30K0.7L0.6 = 30(100)0.7(80)0.6 = 10446.61

ii) Is the current input mix efficient? If not, calculate the efficient input mix based on the total
cost calculated in (i). (5 marks)
0.7 -0.4
MPL = 18K L
MPK = 21K-0.3L0.6
MPL/MPK = w/r
18K0.7L-0.4/21K-0.3L0.6 = 20/50
18K/21L = 2/5
18(100)/21(80) = 2/5
1.071 ≠ 0.4
∴ not efficient
K = 0.4(21L/18) = 0.467L
6600 = 20L + 50K = 20L + 50(0.467L) = 43.35L
∴ L = 6600/43.35 = 152.25
K = 0.467L = 0.467(152.25) = 71.1

iii) Calculate the total quantity produced using the efficient input mix. Show the efficient mix
condition by using the isocost-isoquant diagram. (4 marks)
Q = 30K0.7L0.6 = 30(71.1)0.7(152.25)0.6 = 12104.988
Diagram pls refer manual page 51 for example 5.5 question f

iv) Determine the returns to scale (RTS) of the given production function. (1 mark)
α + β=0.7+ 0.6=1.3 ∴ increasing RTS

Jan 2012 BQ3b

A car parking space in a busy business district of Kuala Lumpur houses a car wash facility. It
charges RM50 for a snow wash. The hourly wage rate is RM45. Recently a researcher
estimated a production function for the car wash service as follows:
Q = -0.8 + 4.5L - 0.3L2
Where Q = number of car wash & L = the labour input
i) Is this a short run or a long run production function? Justify your answer. (2 marks)
SR because K is fixed ie Q = f (L) only

ii) Calculate the profit maximizing number of labour that should be employed. (3 marks)
MPL x P = w
(4.5 – 0.6L)50 = 45
4.5 – 0.6L = 45/50
L = (4.5 – 0.9)/0.6 = 6
iii) How much is the total profit? (3 marks)
Profit = TR – TC Q = -0.8 + 4.5(6) - 0.3(6)2 = 15.4
TR = PQ = 50(15.4) = 770
TC = wL = 45(6) = 270
Profit = 770 – 270 = 500

Jun 2012 AQ2

Jenny Enterprise Sdn. Bhd. is a wholesale distributor of scented candles. The firm wish to
determine the amount of labor input needed for efficient production. The short run production
function for the firm is estimated as
Q = 10.5L – 0.2L2
where:
Q = number of scented candles and
L = number of labor-hours used
a) Derive the marginal product of labour function. (2 marks)
MPL = 10.5 – 0.4L

b) Suppose the price of a scented candle is RM8, how many labor-hour should the firm hire if
each worker is paid RM6 per hour? (4 marks)
MPL x P = w
(10.5 – 0.4L)(8) = 6
84 – 3.2L = 6
78 = 3.2L
L = 24.375

c) Briefly explain the law of diminishing marginal returns. (2 marks)

Defn MPL : If L increases at constant K, MPL will start to reduce.

Jun 2012 BQ3a

Alpha & Co manufactures refrigerators using capital (K) and labour (L) inputs. The production
function(Q) is:
Q = 20K0.3 L0.7
The price of capital is RM30 per unit while that of labour is RM10 per unit. The budget constraint
on buying inputs is RM1,000.
i) Derive the constraint and the lagrangian function. (2 marks)
1000 = 10L + 30K
LQ = 20K0.3 L0.7 – λ (10L + 30K – 1000)

ii) Calculate the optimal input combination of labour and capital using the lagrangian multiplier
technique. (5 marks)
MPL = 14K L – 10λ = 0 x 3
0.3 -0.3

MPL = 42K0.3 L-0.3 – 30λ = 0

MPK = 6K-0.7 L0.7 – 30λ = 0
MPL = MPK: 42K0.3 L-0.3 = 6K-0.7 L0.7
42K = 6L
L = 7K
1000 = 10L + 30K
1000 = 10(7K) + 30K
1000 = 100K
K = 1000/100 = 10
L = 7K = 70
iii) Determine the maximum output the company can manufacture. (2 marks)
Q = 20K0.3 L0.7
Q = 20(10)0.3 (70)0.7 = 780.91

iv) Check whether the solutions obtained in (a) satisfy the optimality condition. (3 marks)
MPL/MPK = w/r
14K0.3 L-0.3/6K-0.7 L0.7 = 10/30
14K/6L = 1/3
14(10)/6(70) = 1/3
0.33 = 0.33
Efficient

v) Calculate the change in output, if the budget constraint is raised by RM1. (2 marks)
10λ = 14K0.3 L-0.3
10λ = 14(10)0.3 (70)-0.3 = 7.809
λ = 7.809/10 = 0.78
Q will increase by 0.78 unit if budget raised by RM1

Jan 2013 AQ4

The profit function (π) for two products: 'Kurus Selamanya' and 'Slim Sangat' produced by
Syarikat Anggun Beauty is as follows:
π = 200K + 100S - KS - 2K2 - S2
where K = product 'Kurus Selamanya' & S = product 'Slim Sangat'
The total production capacity of the firm is 50 units.
a) Compute the amount of 'Kurus Selamanya' and 'Slim Sangat' that should be produced if the
objective is to maximize the profits (use the Lagrangian multiplier technique). (6 marks)
Constraint function: 50 = K + S
πL = 200K + 100S - KS - 2K2 - S2 + λ (50 – K – S)
K’ = 200 – S – 4K – λ = 0
S’ = 100 – K – 2S – λ = 0
K’ – S’ = 100 + S – 3K = 0
S = 3K – 100
Substitute in constraint function, 50 = K + S
50 = K + 3K – 100
4K = 150 ∴ K = 150/4 = 37.5
S = 50 – K = 50 – 37.5 = 12.5

b) If the production constraint is increased to 51 units, what is the impact on profits? (2 marks)
λ = 200 – S – 4K
λ = 200 – 12.5 – 4(37.5) = 37.5
if production increased to 51 unit, profits will increase by RM37.50
Jan 2013 AQ5
You are given the following short run production function.
Q = 4L2 – 0.8L3
Where Q = units of output & L = units of labour
a) Derive the following functions:
i) marginal product of labour (MPL) (1 mark)
MPL = Q’ = 8L – 2.4L2
ii) average product of labour (APL) (1 mark)
APL = Q/L = 4L – 0.8L2

b) How many units of labour should the firm hire in order to maximise total product? (2 marks)
MPL = Q’ = 8L – 2.4L2 = 0
L = 0 or 3.33
L hired 3.33 person

c) What is the maximum level of output that the firm can produce? (1 mark)
Q = 4(3.33)2 – 0.8(3.33)3 = 14.81

d) Calculate the range of labour for the rational stage of production. (3 marks)
Rational stage at stage 2
Start at max APL & end when MPL = 0
Max APL = APL’ = 4 – 1.6L = 0 L = 4/1.6 = 2.5
Range of L at stage 2: 2.5 < L < 3.33

Jan 2013 BQ2

The manager of LGM Engineering Ltd has estimated a production function for the firm as
follows:
Q = 100K0.8L0.5
Where Q = unit of output, L = unit of labour input & K = unit of capital input

a) If the firm uses 10 units of capital and 25 units of labour, determine the total output produced
by the firm. (2 marks)
Q = 100(10)0.8(25)0.5 = 3154.7867

b) If the price of capital and labour is RM20 and RM30 respectively, determine the expansion
path. (4 marks)
MPL = 50K0.8L-0.5
MPK = 80K-0.2L0.5
MPL/MPK = w/r
50K0.8L-0.5/80K-0.2L0.5 = 30/20
50K/80L = 1.5
K = 1.5(80L/50) = 2.4L
c) Using the current input combination, is the firm producing efficiently? If not, determine the
efficient input combination to produce the current output. (8 marks)
50K/80L = 1.5
50(10)/80(25) = 1.5
0.25 ≠ 1.5 ∴ not efficient
Q = 100K0.8L0.5
3154.7867 = 100(2.4L)0.8L0.5
3154.7867 = 100(2.4)0.8(L)0.8L0.5
L1.3 = 3154.7867/(100(2.4)0.8)
L = 1.3 √(3154.7867)/(100(2.4)0.8) = 8.3
K = 2.4L = 2.4(8.3) = 19.92

d) Calculate the total cost incurred by LGM based on the efficient input mix. (2 marks)
TC = wL + rK = 30(8.3) + 20(19.92) = 647.40

e) Determine whether the production function exhibits constant, increasing or decreasing

returns to scale. (2 marks)
α + β=0.8+0.5=1.3 ∴ increasing RTS

f) If the firm decreases the use of capital by 10% and increases the use of labour by 8%, what
would be the percentage change in output of the firm? (2 marks)
∆Q = ∆α + ∆ β
∆Q = -10%(0.8) + 8%(0.5)
∆Q = -4%
∴ Q↓ 4%