Micro 2

Problem-set 2 (Homework 1)

Problem 1 A …rm has the production function f (x; y) = 60x4=5 y 1=5 : Calcu-
late the slope of the …rm’s isoquant at the point (x; y) = (40; 80):

Problem 2 Suppose that the production function is f (x1 ; x2 ) = b (xa1 + xa2 );

where a and b are positive constants. For what values of a and b is there a
diminishing technical rate of substitution?

Problem 3 A …rm has a production function f (x; y) = 1:4(x0:6 +y 0:6 )2 where

x > 0 and y > 0: Investigate, whether the …rm has increasing, decreasing or
constant returns to scale.

Problem 4 Under what conditions do the following production functions ex-

hibit decreasing, constant, or increasing returns to scale?

a) q = l + k

b) q = l + la k b + k

c) q = (a l + [1 a] k )b=
p
Problem 5 Consider a …rm with the production function Q = KL; where
K is amount of capital and L is amount of labor.

a) Write down the equation of the isoquant corresponding to Q = 20:

Provide the plot of the isoquant, putting K on y-axis and L on x-axis.

b) Write down the general equation of the isoquant corresponding to any

level of output Q.

c) Find the technical rate of substitution (of labor for capital) when the
…rm produces 20 units of output with 40 units of labor and the corre-
sponding amount of capital.

Problem 6 Suppose that the …rm has the production function f (x1 ; x2 ) =
p
x1 + x22 :

1
 a) Check that the production function does not satisfy the de…nition of
increasing, decreasing or constant returns to scale. How can this be?

b) Find the combination of inputs such that doubling the amount of both
inputs will more than double the amount of output.

c) Find the combination of inputs such that doubling the amount of both
inputs will less than double the amount of output.

Problem 7 You manage a crew of 160 workers who could be assigned to

make either of two products. Product A requires 2 workers per unit of output.
Product B requires 4 workers per unit of output.

a) Write an equation to express the combinations of products A and B

that could be produced using 160 workers. On a diagram use blue ink
to shade in the area depicting the combinations of A and B that could
be produced with 160 workers (Assume that it is also possible for some
workers to do nothing at all).

b) Suppose now that every unit of product A that is produced requires the
use of 4 shovels as well as 2 workers and that every unit of product
B produced requires 2 shovels and 4 workers. On the graph you have
just drawn, use red ink to shade in the area depicting the combinations
of A and B that could be produced with 180 shovels if there were no
worries about the labor supply. Write down an equation for the set of
combinations of A and B that require exactly 180 shovels.

c) On the diagram, use black ink to shade the area that represents possible
output combinations when one takes into account both the limited supply
of labor and the limited supply of shovels.

d) Find the maximum feasible production amounts of A and B for which

all of the labor and all of the shovels are used up.

e) What is the largest amount of product A that you could produce? If you
produce this amount, you will not use your entire supply of one of the
inputs. Which one? How many will be left unused?