Assignment 2

Wollega University
School of Economics
MSc in Agricultural Economics (Weekend Program)
Advanced Microeconomics (AGEC 511)
Assignment Two (Assignment on Theory of Production)

Note:
 Show your steps clearly
 Make your hand writing clear
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1. If input requirement set V(y) is a convex set, then the associated
production set Y must be convex. Do you agree? Why?
2. Show that the input requirement set V ( y )= {x 1 , x2 :ax 1 + √ x1 x 1+bx 2 ≥ y } is

i). Convex and; i). Monotonic.
3. Constant elasticity of substitution (CES) production function may be

given by the form; Q= f(L,K) = A[Kρ + Lρ]ϵ/ρ where ρ≤ 1, ρ≠ 0,
= 25[K1/2 + L1/2]1/4
a). Find marginal product of capital and labor
b). Find MRTS and Elasticity of substitution
c). Calculate elasticity of scale and based on your result indicate the type
of return to scale that it exhibits.
4. A homothetic function can be written as g(h(x)) where h(x) is

homogeneous of degree 1. Let f(xl, x2) be a homothetic function. Show
that its marginal rate of technical substitution at (x l, x2) equals its
marginal rate of technical substitution at (txl, tx2).
5. Show that a profit-maximizing bundle will typically not exist for a
technology that exhibits increasing returns to scale as long as there is
some point that yields a positive profit.
6. Given the production function; f (x ¿¿ 1, x ¿¿ 2)=x a1 x b2 ¿ ¿ , calculate the profit

maximizing demand and supply functions, and the profit function.
Assume ai>0. What restrictions must a1 and a2 satisfy?
7. Given the production function f (x ¿¿ 1, x ¿¿ 2)=a1 ln x 1+ a2 ln x 2 ¿ ¿, calculate the

profit-maximizing demand and supply functions, and the profit function.
For simplicity assume an interior solution. Assume that ai > 0.
8. A firm has a production function y = x1 x2 .If the minimum cost of

production at wl = w2 = 1 is equal to 4, what is y equal to?
9. The cost function is C(wl, w2, y) = y[wl + w2]. What are the conditional
factor demands? What is the production function?
10. The cost function is C(wl, w2, y) = w a1 wb2 y . What do we know about a
and b?
Tesfaye Kenea ID No
1. No, because if the production set Y is a convex set, then the associated input requirement
set, V (y),is a convex set, but if input requirement set, V (y) is convex, the production set
Y may not convex. It is true for V (y) is a convex set if and only if the production
function f(x) is a quasi-concave function.
2. ( y )= { x 1 , x 2 :ax 1 + √ x 1 x 2+ bx 2 ≥ y }
i) Convex
Deviating by x1
F’=a+1/2x-1/2x21/2=0
F’’=-1/4x1-3/4x21/2 since for x1 its coefficient is decreasing and it is negative , it
shows convex.
ii) Monotonic –it is not monotonic.
3. Q =25[K1/2+L1/2]1/4
a). Find marginal product of capital and labor
dQ/dK=25(1/4)[K1/2+L1/2]-3/4*1/2K-0.5
=25/4(K1/2+L1/2)-3/41/2K-1/2
=
25/4(K-3/8+L-3/8)1/2K-1/2
=25/4(1/2K-7/8+1/2L-3/8K-1/2)
=25/8(K-7/8+L-3/8K-1/2)
dQ/dL =25(1/4)(K1/2+L1/2)-3/4*1/2L-1/2
=25/8(K-3/8+L-3/8)*L-1/2
=25/8(K-3/8 L-1/2+L-7/8)
b). Find MRTS and Elasticity of substitution
MRTSL,K=-MPL/MPK-if L is substituting factor
=-25/8(K-3/8 L-1/2+L-7/8)/25/8(K-7/8+L-3/8K-1/2)
= - ( K-3/8 L-1/2+L-7/8)/(K-7/8+L-3/8K-1/2)
=-(K3/8L1/2+L1/2)/(K7/8+L3/8K1/2)
MRTK,L=-MPK/MPL –if K is substituting
=-25/8(K-7/8+L-3/8K-1/2)/ 25/8(K-3/8 L-1/2+L-7/8)
=-(K-7/8+L-3/8K-1/2)/ ( K-3/8 L-1/2+L-7/8)
=-(K7/8+L3/8K1/2)/ (K3/8L1/2+L1/2)
Elasticity of substitution=%age change in K/L/%age change in MRTS
=Δ (K/L)/K/L ÷ ΔMRTS/MRTS
But since d(K/L)/dMRTSxMRTS/K/L =1/1-p
for CES production function; since p=1/2
Elasticity of substitution= 1/1-1/2=1/1/2=2
c). Calculate elasticity of scale and based on your result indicate the
type of return to scale that it exhibits.
4. For f(x1,x2) MRTS is
df((x1,x2)/dx1=dfx1,x2
df((x1,x2)/dx2=x1,dfx2
dx2/dx1=dfx1/dfx2
=( dfx1,x2)/( x1,dfx2)
For f(tx1,tx2) MRTS
df(tx1,tx2)/dx1=t(dfx1,x2)
df(tx1,tx2)/dx2=t(x1,dfx2)
dx2/dx1= t(dfx1,x2)/ t(x1,dfx2)
= (dfx1,x2)/( x1,dfx2)
So, (dfx1,x2)/( x1,dfx2)= (dfx1,x2)/( x1,dfx2) for both
5.If xt is a production function and t>1
The first derivate of xt is txt-1 is positive

Again the second derivate is t(t-1)xt-2 is positive
Since for profit maximization this sufficient condition is the second derivative is less than zero,
for increasing to return the second derivative is positive and this shows the minimum point, it
does not exhibit the rule.
6. profit maximizing demand for f(x1,x2 )=x1ax2b is obtained as:-
Π=pf(x1,x2)-w1x1-w2x2
pdf(x1*,x2*)/x1-w1= 0
pdf(x1*,x2*)/x2=0
ax1a-1x2b-w1=0
bx1ax2b-1 –w2=0
Multiply the first equation by Xl and the second equation by X2 to get
pax1ax2b-w1x1=0
pbx1ax2b –w2x2=0
using y=x1ax2b
pay=w1x1
pby =w2x2
x1(p,w1)=pay/w1
x2(p,w2)=pby/w2
y=(pay/w1)a(pby/w2)b
factoring y
y=ya+b(pa/w1)a(pb/w2)b
supply function is:-
y/ ya+b=(pa/w1)a(pb/w2)b
y1-a-b=(pa/w1)a(pb/w2)b
y=((pa/w1)a(pb/w2)b)1/1-a-b
y=(pa/w1)a/1-a-b( pb/w2)b/1-a-b
The profit maximization function is
Π=pf(x1,x2)-w1x1-w2x2
a+b>1 satisfies the condition for a&b>0
7.f(x1,x2)=a1lnx1 + a2lnx2
Π=pd pf(x1,x2)-w1x1-w2x2
a1p/x1-w1=0
a2p/x2-w2=0
Multiply the first equation by Xl and the second equation by X2 to get
a1p=w1x1
a2p=w2x2
solving for x1 and x2
x1= a1p/ w1
x2= a2p/ w2
So, profit maximizing demand is:
y=a1ln (a1p/ w1) + a2ln(a2p/ w2)
Profit function is:
Π=p(a1ln (a1p/ w1) + a2ln(a2p/ w2)-w1x1-w2x2

8.y=x1x2
min x1 + x2
x1x2 = y.
Substitute to get the unconstrained minimization problem
min XI +y/xl.
The first-order condition is
1 – y/x2
which implies xl = y1/2fi. By symmetry, x2 =y1/2 fi. We are given that
2y1/2 = 4, so y1/2 = 2, from which it follows that y = 4.
9.

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Wollega University

Advanced Microeconomics (AGEC 511)

Assignment Two (Assignment on Theory of Production)

2. Show that the input requirement set V ( y )= {x 1 , x2 :ax 1 + √ x1 x 1+bx 2 ≥ y } is

3. Constant elasticity of substitution (CES) production function may be

4. A homothetic function can be written as g(h(x)) where h(x) is

6. Given the production function; f (x ¿¿ 1, x ¿¿ 2)=x a1 x b2 ¿ ¿ , calculate the profit

7. Given the production function f (x ¿¿ 1, x ¿¿ 2)=a1 ln x 1+ a2 ln x 2 ¿ ¿, calculate the

8. A firm has a production function y = x1 x2 .If the minimum cost of

The first derivate of xt is txt-1 is positive

6. profit maximizing demand for f(x1,x2 )=x1ax2b is obtained as:-

Multiply the first equation by Xl and the second equation by X2 to get

a+b>1 satisfies the condition for a&b>0

So, profit maximizing demand is:

y=a1ln (a1p/ w1) + a2ln(a2p/ w2)

Profit function is:

Π=p(a1ln (a1p/ w1) + a2ln(a2p/ w2)-w1x1-w2x2

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