ECON0013 Microeconomics 1

Problem Set 3

1. One unit of output can be produced by any of the following combina-

tions of inputs:

Z 1 = (0.2, 0.5), Z 2 = (0.3, 0.2), Z 3 = (0.5, 0.1).

(a) Construct the isoquant for q = 1.

(b) Assuming constant returns to scale construct the isoquant for q =
2.
(c) If the technique Z 4 = (0.25, 0.5) were available would it be in-
cluded in your answer to part a?

2. A firm has the technology q = z1α z2β + γz3 + δ where: z1 , z2 and z3

are its inputs, there are non-negative constants α, β, γ, δ and q is its
output.

(a) Do the isoquants touch the axes?

(b) What are the MRTS’s between the three products?
(c) For what values of the constants is this technology homogeneous?
(d) For what values of the constants is this technology homothetic?
(e) Suppose the input prices are a, b, c > 0 for the three products.
Find the cheapest cost of producing q units of output using only
the third input. Find the cheapest cost of producing q units of
output using the first two inputs. When is it optimal to not use
all the inputs?

3. The firms in a perfectly competitive industry have the cost function

c(q) = 324 + 8q + 4q 2 .

(a) Determine when these firms experience increasing, decreasing and

constant returns to scale.
(b) Find the firms’ SR and LR supply curves.
(c) Find the industry’s SR and LR supply curve assuming the industry
currently contains 80 firms.
(d) If the current demand curve is 1600 − 100p = q are firms entering
or exiting the industry?
ECON0013 Microeconomics 2

4. A firm produces goods 1 and 2 using goods 3,4,5 as inputs. The pro-
duction of one unit of good i (i = 1, 2) requires at least aij units of
good j (j = 3, 4, 5).

(a) Assuming Constant returns to scale, how much of resource j will

be needed to produce q1 units of good 1?
(b) For given values q3 , q4 , q5 sketch the technologically feasible out-
puts of goods 1 and 2.