Prob1: Suppose: Q = 1.4 L .70 K .

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1. Is this function homogeneous?
2. Is the production function constant returns to scale?
3. What is the production elasticity of labor?
4. What is the production elasticity of capital?
5. What happens to Q, if L increases 3% and capital is cut 10%?
6. If the cost restraint is C0=90, and CK =2, CL=1, what is the efficient input
allocation?
Answers
1. Yes. Increasing all inputs by, increases output by 1.05. It is homogeneous of degree
1.05.
2. No, it is not constant returns to scale. It is increasing Returns to Scale, since 1.05 > 1.
3. .70 is the production elasticity of labor.
4. .35 is the production elasticity of capital.
5. %DQ = EL %DL+ EK %DK =.7(+3%) + .35(-10%) = 2.1% -3.5% =-1.4%.
6. K*= 30 and L*=30.
Prob2: The airline industry is more likely to focus on pricing competition than the paperback
book publishing industry. Why?
An 80 percent price-cost margin implies that a sales increase of only 15 percent is all that one
requires to warrant cutting prices by 10 percent.

In contrast, in paperback book publishing, a price-cost margin of 12 percent implies sales must
increase by better than 500 percent in order
to warrant a 10 percent price cutthat is, 0.12/0.02 < 1 + 5.0+. Because a marketing plan that
creates a 15 percent sales increase from a 10 percent price cut is much more feasible than one
that creates a 500 percent sales increase from a 10 percent price cut.
Prob1: Assume Adobe Corporation faces the following total revenue and
total cost functions:
Total revenue:TR =8Q
Total cost:TC = Q2+4Q+2
Please solve for the profit-maximizing level of Q.
Marginal revenue:
MR =dTR/dQ=$8/unit
 Marginal cost:
MC = dTR/dQ=2Q+4
Total profit:
=TR-TC==8Q-(Q2+4Q+2)=-Q2+4Q-2
To maximize total profit,
d/dQ=-2Q+4=0
Q* =2 units
Problem: For the industry:
QS = 3000 + 200 P and
QD = 13500 - 500 P
For the firm:
FC = 50 and MC = 3Q
Question: (1) Find the market equilibrium price;
(2) Find the optimal output for the firm;
(3) For the firm, what is the shutdown price.
Answer: (1) Set D = S, we see
3,000 + 200 P = 13,500 - 500 P
This implies that the market equilibrium price
is P = $15.
(2) At this price, the firm produces where
P = MC, so Q =5;
(3) Since MC = 3Q, then VC = 3Q2/2 which
implies AVC = 3Q/2 and the lowest AVC is
zero, thus the shutdown price is 0.
Prob4: The market for DVD rentals in Charlotte, North Carolina, can best be described as
monopolistically competitive. The demand for DVD rentals is estimated to be P=100.004Q
where Q is the number of weekly DVD rentals. The long-run average cost function for
Blockbuster is estimated to be
LRAC=80.006Q+ 0.000002Q2
Blockbusters managers want to know the profitmaximizing price and output levels, and the level
of expected total profits at these price and output levels.
l First, compute total revenue (TR) as: TR=P Q=10Q0.004Q2
l Next, compute marginal revenue (MR) by taking the first derivative of TR:
MR =dTR/dQ=10-0.008Q
l Compute total cost (TC) by multiplying LRAC by Q:
TC=LRAC Q=8Q0.006Q2+ 0.000002Q3
l Compute marginal cost (MC) by taking the first derivative of TC:
MC = dTC/dQ=8-0.012Q+0.000006Q2
Next, set MR=MC
10-0.008Q=8-0.012Q+0.000006Q2
0.000006Q2-0.004Q-2=0
Use the quadratic formula to solve for Q. Q*is equal to 1,000.
At this quantity, price is equal to P* =10-0.004(1,000)=10-4=$6
Total profit is equal to the difference betweenTR and TC, or
=TR-TC
= 10Q-0.004Q2-[8Q-0.006Q2+0.000002Q3]
=10(1,000)-0.004(1,000)2-[8(1,000)-0.006(1,000)2
+0.000002(1,000)3]
=$2,000
The MR and MC at these price and output levels are $2. The fact that Blockbuster expects to
earn a profit of $2,000 suggests that the firm can anticipate additional competition, resulting
in price cutting that will ultimately eliminate this profit amount.
To sell one more unit of output will cost the price of the added message, k, divided by the
marginal product of a dollar of advertising (DQ/DA).
If a radio message costs $1000, and if that message yields 5 new items sold, then the marginal
cost of advertising is $200, ($1000 /marginal product of advertising).
If it costs $200 to sell one more car (MCA=$200), and if the contribution of another car sold is
$300 to profits, then we should expand promotional expenses.
Prob1: Suppose the following product function is estimated to be:
in Q=2.33+.19 in K+.87 in L R2=.97
1. Is this question constant return to scale?
2. If L increases 2% what happens to output?
3. Whatss the MpL at L=50, k=100,& Q=741
Consider the following short run production function (where L
=variable input and Q = output): Q = 6L2 0.4L3
1.Determine the marginal product function (MPL).
2.Determine the average product function (APL).
3.Find the value of L that maximizes Q.
4.Find the value of L at which the marginal product function takes
on its maximum
5.Find the value of L at which the average product function takes
on its maximum value.
Answer
a.Determine the marginal product function (MPL).
MPL = dQ/dL=10-; = 16.8L2
b.Determine the average product function (APL).
APL = Q/L = 5.6L2
c.Find the value of L that maximizes Q.
Q = max, when dQ/dL; = MPL = 0, L = 0
d.Find the value of L at which the marginal product function takes on its maximum
MPL = max, when MPL&#039; = 0, 33.6L = 0, L = 0
e.Find the value of L at which the average product function takes on its maximum value.
APL = max, when APL&#039; = 0, 11.2L = 0, L = 0