Practice Set 2

V. Bardis

1. Consider a firm which produces q units of output using L units of labour and K units of capital.
The firm's production function is

q = F(L,K) = 10 ln(L+1) + ln(5K+1)

a) Find the marginal product of labour and the marginal product of capital of the firm.

b) Use calculus to determine whether the marginal product of labour is constant, decreasing or increasing in labour.

c) Use calculus to determine whether the marginal product of labour is constant, decreasing or increasing in capital.

d) Use calculus to determine whether the marginal product of capital is constant, decreasing or increasing in labour.

e) Use calculus to determine whether the marginal product of capital is constant, decreasing or increasing in capital.
2. Consider a firm which produces q units of output using L units of labour and K units of capital.
The firm's production function is

q=

a) Find and interpret the first-order partial derivatives of the function.

b) Find and interpret the second-order partial derivatives of the function.

c) Find the partial elasticities of the function. Then calculate and interpret the value of each elasticity at the point
(L,K) = (10, ln(2) ) .
3. a) Consider a firm which produces q units of output using L units of labour and K units of capital.
The firm's production function is

q = F(L,K) =

a) Calculate F(16,27) i.e., the output the firm will produce if L = 16 and K = 27.

b) Suppose the firm keeps capital constant at K=27 and increases its labour to L = 25. Calculate the percent
increase in labour.

c) Calculate F(25,27) i.e., the output the firm produces with 25 units of labour and 27 units of capital.
Then calculate the percent increase in output.

d) Find the partial elasticity of the production function with respect to labour and,
starting at (L,K) = (16,27), use it to find an estimate of the percent change in output given the
the percent change in labour you calculated in part (b). Is your estimate close to the true value?
4. Consider a firm which produces q units of output using L units of labour and K units of capital.
The firm's production function is

q=

a) Suppose the firm has 10 units of labour, i.e., L =10, and ln(2) units of capital, i.e., K = ln(2).
Calculate the output the firm will produce with these input amounts, i.e., find F(10,ln(2)).

b) Suppose the firm keeps labour constant at L=10 and increases its capital to K = ln(4). Calculate the
percent increase in capital.

c) Calculate F(10,ln(4)) i.e., the output the firm produces with 10 units of labour and ln(4) units of capital.
Then calculate the percent increase in output.

d) Find the partial elasticity of the production function with respect to capital and,
starting at (L,K) = (10, ln(2)), use it to find an estimate of the percent change in output given the
the percent change in labour you calculated in part (b). Is your estimate close to the true value?
5. The utility function of a person who consumes x units of good X and y units of good Y is given by

U(x,y) = xy

a) Find and interpret the first-order partial derivatives of the utility function.

b) Find and interpret the second-order partial derivatives of the utility function.

c) Determine whether the ratio of the first-order partial derivatives, Ux' / Uy', depends only on the ratio of the
quantities of the two goods, y/x.
6. The utility function of a person who consumes x units of good X and y units of good Y is given by

a) Find marginal utility of good X and the marginal utility of good Y.

b) Use calculus to determine how an increase in the amount of good X will affect the marginal utility of good X.

c) Use calculus to determine how an increase in the amount of good Y will affect the marginal utility of good X.

d) Determine whether the ratio of the first-order partial derivatives, Ux' / Uy', depends only on the ratio of the
quantities of the two goods, y/x.
7. The utility function of a person who consumes x units of good X and y units of good Y is given by

, where r ≠ 0

a) Find marginal utility of good X and the marginal utility of good Y.

b) Use calculus to determine how an increase in the amount of good X will affect the marginal utility of good X.

c) Use calculus to determine how an increase in the amount of good Y will affect the marginal utility of good X.

d) Determine whether the ratio of the first-order partial derivatives, Ux' / Uy', depends only on the ratio of the
quantities of the two goods, y/x.
8. The utility function of a person who consumes x units of good X and y units of good Y is given by

U(x,y) =20 -1/x + y

a) Find and interpret the first-order partial derivatives of the utility function.

b) Find and interpret the second-order partial derivatives of the utility function.

c) Determine whether the ratio of the first-order partial derivatives, Ux' / Uy', depends only on the ratio of the
quantities of the two goods, y/x.
9. Suppose a firm's total cost is a function of the price of labour (w), the price of capital (r) and the output
produced (q) and given by

a) Find the firm's marginal cost.

b) Find the firm's average cost.

c) Find the elasticity of the firm's total cost with respect to output assuming input prices do not change. Then
compare it to the ratio MC/AC.

d) Find an interpret the following partial derivatives of the cost function:

e) Find and interpret the partial elasticity of the cost function with respect to r.
10. The quantity of ground coffee Andrea buys each month (X) depends on her income (I), the price of coffee
(Pc) and the price of sugar (Ps) such that X = 2I /(3Pc + 2Ps ).

a) Using calculus, determine the effect of an increase in income on the amount of coffee Andrea buys, other
things equal, i.e., assuming the prices do not change.

b) Using calculus, determine the effect of an increase in the price of coffee on the amount of coffee Andrea
buys, other things equal, i.e., assuming her income and the price of sugar do not change.

c) Using calculus, determine the effect of an increase in the price of sugar on the amount of coffee Andrea
buys, other things equal, i.e., assuming her income and the price of coffee do not change.

d) Find and interpret the partial elasticity of X with respect to each one of the specified variables.

e) The sum of the partial elasticities of every demand function must be equal to zero. Confirm this holds for
Andrea's demand function for coffee.
11. Suppose the demand for input 1 by Tom's firm is given by

where wi denotes the price of input i, i=1,2, and p is the price of output Tom's firm sells.

a) Find and interpret the partial elasticities of this demand function.

b) The sum of the partial elasticities of every input demand function must be equal to zero.
Confirm this hold for Tom's input demand.

c) Use calculus to determine whether Tom will spend more money on input 1 when the price of the input increases.
12. If Donald deposits P dollars in investment account X (which compounds interest continuously), the money
after t years will grow to become F dollars according to the function

where r is the annual (nominal) rate of interest.

a) Find and interpret the partial derivative of F with respect to each of the specified variables, P, r, and t.

b) Find and interpret the partial elasticity of F with respect to each of the specified variables P, r, and t.

c) Note that if we invert the above function so that we solve for P (the amount invested today) in terms of F, r
and t, we get

This function gives the `present amount' that must be invested in order to receive F dollars t years from today
given continuous compounding at the annual rate r. Find and interpret the partial elasticities of this function.