EC 203 - INTERMEDIATE MICROECONOMICS

Boğaziçi University - Department of Economics

Fall 2019
Problem Set 6

1. Suppose that a firm is required to produce 200 units of output using quantities of labor and capital L = 8
and K = 10. For each of the production function given below, (1) state whether it is feasible to produce
the required output with the given input combination, and (2) if it is feasible, state whether the input
combination is efficient or not.

(a) f (L, K) = KL + 2L + 100

(b) f (L, K) = 2KL + 40
(c) f (L, K) = 12 min{3L, 2K}
(d) f (L, K) = 10L1/3 K
(e) f (L, K) = 10L + 8K

2. For each of the following production functions, (1) find M PL and M PK , (2) state whether M RT SL,K is
diminishing or not, and (3) state whether it has increasing returns to scale, decreasing returns to scale or
constant returns to scale.

(a) f (L, K) = KL2 + L

(b) f (L, K) = 7L + 12K − 4
(c) f (L, K) = 3L1/3 K
(d) f (L, K) = min{3L, K}

3. Suppose production function is given as

K L c
 
f (L, K) = min( , ) ,
a b

where a, b, c > 0 are all positive constants. The input prices are r and w, for K and L, respectively.

(a) Does this production function exhibit increasing, decreasing or constant returns to scale, when a = 1/2
and b = 1/3?
(b) Without specifying a and b, find the conditional input demand functions K(q, r, w), L(q, r, w) and the
cost function c(q, w, r).
(c) How are the conditional factor demands K(q, w, r), L(q, w, r) and the cost function c(q, w, r) affected
by the prices of the inputs, r and w? Using economic intuition, what can we say about why this is so?
(d) Let’s now fix r and w and rewrite the cost function c(q, w, r) as a function of q only. Assume there is no
fixed cost. More specifically, define the constant A such that A = ra + wb and write the cost function
as c(q). What is the marginal cost function, M C(q), for this firm? What is the marginal cost function,
AT C(q), for this firm? What are the slopes of the respective cost curves M C(q) and AT C(q)?
(e) Describe the relationship between returns to scale and the shape of the cost curves M C(q) and AT C(q)?

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4. Suppose that a firm has a production function f (L, K) = 3LK + K, the input prices are w = 6 and r = 10.

(a) If the firm is targeting q = 125, then find the long-run cost minimizing labor and capital combination.
Write the total cost function.
(b) If the firm is targeting q = 20, then find the long-run cost minimizing labor and capital combination.
Write the total cost function.
(c) Suppose the wage rate increases and is now w0 = 10 and the rent is r = 10, find the long-run cost
minimizing inputs bundle for q = 125. Compare them to your findings in part (a) and (b).

5. Producing ice cream requires both capital (K) and labor (L). Suppose that the production function for the
ice cream is given by f (L, K) = KL2 .

(a) If the wage rate is w = 40 and the rental rate of capital is r = 1, what is the least costly way (how
much capital and how much labor) to produce 20 units of ice cream?
(b) What is the total cost using the least costly method?
(c) Suppose ice cream makers suddenly become more productive, changing the production function for
the ice cream to f (L, K) = KL3 . At the same time, the wage rate for the ice cream making workers
also changed from w = 40 to a new wage rate of w.
b The firm producing ice cream finds that that
the cheapest combination of capital and labor to produce 20 units of ice cream has not changed from
before. That is, the least costly way of making 20 units is the same as in part (a). What must the new
wage level w
b be on order for this to be the case?
(d) Give some intuition for your answer to part (c), comparing the new wage w
b to the old wage of 40. If
the wages of the workers depended only on their productivity, would the scenario described in part (c)
be likely to occur?
(e) Suppose for the rest of the question that production has gone back to f (L, K) = KL2 , the wage rate
is back to w = 40, and the rental rate of capital is r = 1. Furthermore the firm is stuck with having
exactly 20 units of capital. What is the short run total cost curve for the firm when K = 20? What
are its total costs when producing 20 units with capital fixed at K = 20?
(f) What is the long run total cost curve for makers ice cream? What is the total cost of producing 20
units when both capital and labor can be altered?
(g) Is the total cost in part (e) (with K = 20 fixed) less, more, or the same as in parts (b) and (f) (in which
K can be altered)? Explain why.

6. Consider a firm with a production function f (L, K) = ln (K) + L. Let r, w be the input prices for inputs K
and L, respectively, and let p be the price of the output q. Find the firm’s cost function c (q, w, r).

7. Suppose a firm has the following production function, which takes three inputs, L, K and M , and produces
a single output: f (L, K, M ) = 3L1/3 K 1/3 + M . Suppose the input prices are given by w for L, r for K and
1 for M. Find the conditional input demand functions L(q, w, r), K(q, w, r, ) and M (q, w, r), and the cost
function c(q, w, r). Assume interior solutions.

8. For each of the total cost functions given below, (1) find the AC, AV C, AF C and M C, and (2) show that
M C intersects the AV C at its minimum. (a) T C(q) = 2q 2 − q + 4, (b) T C(q) = 1000 + 50q 2 , and (c)
T C(q) = q 3 + 1.