Intermediate Microeconomics

Exercises Chapters 9-11

9.2
Suppose the production function for widgets is given by
q = kl – 0.8k2 – 0.2l2,
where q represents the annual quantity of widgets produced, k
represents annual capital input, and l represents annual labor input.

a. Suppose k=10; graph the total and average productivity of labor curves. At
what level of labor input does this average productivity reach a maximum? How
many widgets are produced at that point?
 q = kl – 0.8k2 – 0.2l2 APl = q/l
TP = q = 10 – 80/l – 0.2l
k=10
45 Max at: dAPl/dl =0
40 ® 80/l2 – 0.2 = 0
q = 10l –80 – 0.2l2 q = – 0.2l2 + 10l –80
® l2 = 400
® l - 20

Remember: y = ax2 + bx + c

a>0: Top = - b/2a

a<0: Intersection with x-axis if y = 0: ABC-formula!
l
10 20 25 40
Here: a = -0.2; b = 10; c = - 80 Top: = -10/-0.4 = 25
Intersection x-axis: 0 = 10l – 80 – 0.2l2
l = = = 25 ± 6/0.4
l = 10  40
9.2
Suppose the production function for widgets is given by
q = kl – 0.8k2 – 0.2l2,
where q represents the annual quantity of widgets produced, k
represents annual capital input, and l represents annual labor input.

a. Suppose k=10; graph the total and average productivity of labor curves. At
what level of labor input does this average productivity reach a maximum? How
many widgets are produced at that point?
b. Again assuming that k = 10, graph the MPl curve. At what level of labor
input does MPl = 0?
MPl = = 10 – 04 l

MPl =  l = 25

Note: MPl crosses APl at it maximum value, since for the 10

maximum, it must hold that:
MPl
= 0 = MPl = APl

2 APl l
10 20 25 40
9.2
Suppose the production function for widgets is given by
q = kl – 0.8k2 – 0.2l2,
where q represents the annual quantity of widgets produced, k
represents annual capital input, and l represents annual labor input.

a. Suppose k=10; graph the total and average productivity of labor curves. At
what level of labor input does this average productivity reach a maximum? How
many widgets are produced at that point?

b. Again assuming that k = 10, graph the MPl curve. At what level of labor
input does MPl = 0?

c. Suppose capital inputs were increased to k = 20. How would your answers
to parts (a) and (b) change?
 k=20
• Do it yourself
• APl maximal at l = 40 ; q = 160
• MPl = 0 at l = 50 since MPl = 20 -0.4l
9.2
Suppose the production function for widgets is given by
q = kl – 0.8k2 – 0.2l2,
where q represents the annual quantity of widgets produced, k
represents annual capital input, and l represents annual labor input.

a. Suppose k=10; graph the total and average productivity of labor curves. At
what level of labor input does this average productivity reach a maximum? How
many widgets are produced at that point?

b. Again assuming that k = 10, graph the MPl curve. At what level of labor input does MPl = 0?

c. Suppose capital inputs were increased to k = 20. How would your answers to parts (a) and (b)
change?

d. Does the widget production function exhibit constant, increasing, or decreasing returns to
scale?
q = kl – 0.8k2 – 0.2l2
• q= f(k, l)
f(tk, tl) = (tk)(tl) – 0.8 (tk)2 – 0.2 (tl)2 t>1
= t2 kl – t20.8k2-0.2 t2l2 = t2f(k,l)
so, increasing returns to scale
10.3
Suppose that a firm’s fixed proportion production function is given by
q =min(5k, 10l).
a. Calculate the firm’s long-run total, average, and marginal cost functions.
 q = min(5k, 10l).
Note: In the long run, no input should be
wasted. Hence

expansion
Note: The inputs are used in fixed proportions (k = 2l) k path

RTS (of l for k) 

because the RTS is undetermined at the kinks.
q = 150
30
kc(v,w,q)  = ; lc(v,w,q)  =

20
q = 100
Note: These expressions are independent of v and w as
the proportion of labor and capital used is fixed: no C2 q = 50
substitution is possible. 10

C(v,w,q) = wlc + vkc = w(q/10) + v(q/5) = (w/10 + v/5)q C1 l

AC(v,w,q) = C/q = w/10 + v/5; MC(v,w,q)  = w/10 + v/5 5 10 15 20
10.3
Suppose that a firm’s fixed proportion production function is given by
q =min(5k, 10l).
a. Calculate the firm’s long-run total, average, and marginal cost functions.
b. Suppose that k is fixed at 10 in the short run. Calculate the firm’s short-run
total, average, and marginal cost functions.

Short run: k=10 q =min(50, 10l).

l ≤ 5, q = 10l  lc(v,w,q) = q/10  C(v, w, q) = wq/10 + 10 v

l > 5, q = 50  C(v, w, q) = wl + 10v

Profit maximizing firm will never choose l > 5, so C(v, w, q) = wq/10 + 10 v, q ≤ 50

AC(v, w, q) = C/q = w/10 + 10 v/q; MC(v, w, q) = w/10 .
10.3
Suppose that a firm’s fixed proportion production function is given by
q =min(5k, 10l).
a. Calculate the firm’s long-run total, average, and marginal cost functions.
b. Suppose that k is fixed at 10 in the short run. Calculate the firm’s short-run
total, average, and marginal cost functions.
c. Suppose v = 1 and w = 3. Calculate this firm’s long-run and short-run average
and marginal cost curves.

LR: C(q) = (3/10 + 1/5) q = q/2

SR: C(q) = (3/10)q +10, q ≤ 50
10.5
An enterprising entrepreneur purchases two firms to produce widgets. Each firm
produces identical products, and each has a production function given by
q = (ki li )0.5 i = 1, 2

The firms differ, however, in the amount of capital equipment each has. In particular,
firm 1 has k1 = 25 whereas firm 2 has k2 = 100. Rental rates for k and l are given by
w = v = $1.
a. If the entrepreneur wishes to minimize short-run total costs of widget production,
how should output be allocated between the two firms?
q = (ki li )0.5 i = 1, 2; k1 = 25, k2 = 100. w = v = $1.

q1 = 25 l1 = 5 l1  l1 = q1/5  l1c = q12/25

q2 = 100l2 = 10 l2  l2 = q2/10  l2c = q22/100

SC1 = v k1 + w l1 = 25 + l1 = 25 + q12/25
SC2 = 100 + q22/100
SC = SC1 + SC2= 125 + q12/25+ q22/100

To minimize cost, set up

Langrangian:
L = SC +  (q - q1 – q2)
4q1= q2
10.5
An enterprising entrepreneur purchases two firms to produce widgets. Each firm
produces identical products, and each has a production function given by
q = (ki li )0.5 i = 1, 2

The firms differ, however, in the amount of capital equipment each has. In particular,
firm 1 has k1 = 25 whereas firm 2 has k2 = 100. Rental rates for k and l are given by
w = v = $1.
a. If the entrepreneur wishes to minimize short-run total costs of widget production,
how should output be allocated between the two firms?
b. Given that output is optimally allocated between the two firms, calculate the short-
run total, average, and marginal cost curves. What is the marginal cost of the 100th
widget? The 125th widget? The 200th widget?
q = (ki li )0.5 i = 1, 2; k1 = 25, k2 = 100. w = v = $1.
SC = SC1 + SC2= 125 + q12/25+ q22/100

• q = q1+ q2 = 5q1  q1 = q/5; q2 = 4q/5

• So SC = 125 + (q/5)2/25 + (4q/5)2/100 = 125 + q2/625 +
16q2/250
= 125 + q2/125

SMC = 2q/125
SAC = 125/q + q/125

SMC(100) = 1.60; SMC(125)= 2.00; SMC(200)=3.20

10.6
An enterprising entrepreneur purchases two firms to produce widgets. Each firm produces
identical products, and each has a production function given by
q = (ki li )0.5 i = 1, 2

The firms differ, however, in the amount of capital equipment each has. In particular, firm 1 has k1
= 25 whereas firm 2 has k2 = 100. Rental rates for k and l are given by
w = v = $1.
a. If the entrepreneur wishes to minimize short-run total costs of widget production, how should
output be allocated between the two firms?
b. Given that output is optimally allocated between the two firms, calculate the short-run total,
average, and marginal cost curves. What is the marginal cost of the 100th widget? The 125th
widget? The 200th widget?
c. How should the entrepreneur allocate widget production between the two firms in the long
run? Calculate the long-run total, average, and marginal cost curves for widget production.
 q = (ki li )0.5 i = 1, 2; w = v = $1.

LR: Given constant returns to scale (Cobb-Douglas!) location does not really matter because
one can change k.
The entrepreneur is indifferent on whether to produce at one location or both

At both plants: MRTS = w/v 

= ; = C = 2q

C = k + l = 2q
AC = 2 = MC
10.5
An enterprising entrepreneur purchases two firms to produce widgets. Each firm produces identical
products, and each has a production function given by
q = (ki li )0.5 i = 1, 2

The firms differ, however, in the amount of capital equipment each has. In particular, firm 1 has k1 = 25
whereas firm 2 has k2 = 100. Rental rates for k and l are given by
w = v = $1.
a. If the entrepreneur wishes to minimize short-run total costs of widget production, how should output
be allocated between the two firms?
b. Given that output is optimally allocated between the two firms, calculate the short-run total, average,
and marginal cost curves. What is the marginal cost of the 100th widget? The 125th widget? The
200th widget?
c. How should the entrepreneur allocate widget production between the two firms in the long run?
Calculate the long-run total, average, and marginal cost curves for widget production.
d. How would your answer to part (c) change if both firms exhibited diminishing returns to scale?
• Decreasing returns to scale: split output equally over loations
• AC, MC: increasing in q (not constant anymore)
10.7
Suppose the total-cost function for a firm is given by

a. Use Shephard’s lemma to compute the (constant output) demand function for each
input, k and l .
= qB2 with B  +

Shephard’s lemma:
𝑐
𝑘 =
𝜕𝐶
𝜕𝑣
=(√ 𝑤
𝑣 )
+1 𝑞=𝑞𝐵 𝑣 −0.5
𝑐
𝑙 =
𝜕𝐶
𝜕𝑤 (√
=
𝑣
𝑤 )
+1 𝑞=𝑞𝐵 𝑤
−0.5
10.7
Suppose the total-cost function for a firm is given by

a. Use Shephard’s lemma to compute the (constant output) demand function for each
input, k and l .
b. Use the results from part (a) to compute the underlying production function for q.
Note that the cost function follows from the cost minimizing rule: MRTS = w/v

From a): 𝑘𝑐 =
𝜕𝐶
𝜕𝑣 (√
=
𝑤
𝑣 )
+1 𝑞=𝑞𝐵 𝑣 −0.5 𝑙𝑐 =𝑞𝐵 𝑤−0.5

√ ( )
𝑐 𝑐 2
𝑘 𝑤 𝑤 𝑘
→ 𝑐= → = 𝑐
𝑙 𝑣 𝑣 𝑙

This implies that MRTS = . Substituting the MRTS into the contingent demand for
capital function yields:

=
= qB2 with B  +

Shephard’s lemma:
𝑐
𝑘 =
𝜕𝐶
𝜕𝑣
= (√ 𝑤
𝑣 )
+1 𝑞=𝑞𝐵 𝑣 −0.5
𝑐
𝑙 =
𝜕𝐶
𝜕𝑤 (√
=
𝑣
𝑤 )
+1 𝑞=𝑞𝐵 𝑤
−0.5

𝑞 ❑ 𝑣 0.5
=
𝑘 𝐵 =
❑ 0.5
=1
𝑞 𝑤
=
𝑙 𝐵
E1
A firm has a production function given by
q = f(x1, x2) = min(2x1 + x2, x1 + 2x2)

a. What is the cost function c(w1,w2, q) for this technology?

 q = f(x1, x2) = min(2x1 + x2, x1 + 2x2)
x2
1st technique C4
2x1+ x2 = q  x2 = q - 2x1 isoquant = north-
slope: -2 4
east boundary of
intercept, say q = 4 this cross
1st technique
2 nd
technique 3
x1+ 2x2 = q  x2 = q/2 - x1/2
slope: -1/2 2
intercept: q/2
C1
C = w1x1+ w2x2  x2 = C – (w1/w2)x1 1
C2
slope isocost function: - w1/w2
x1
Three possible cases: 1 2 3 4 C3
1. w1/w2 < ½  x1 = q ; x2 = 0 C(w1, w2, q) = w1q
2. w1/w2 > 2  w2/w1 > 1/2  x1 = 0; x2 = q C(w1, w2, q) = w2q Cost function
3. 2> w1/w2 > ½  x1 = x2 = q/3 C(w1, w2, q) = (w1+w2)q/3 C(w1, w2, q) = min[w1, w2,
[4&5: w1/w2 = ½ and w1/w2 = 2 ]
E1
A firm has a production function given by
q = f(x1, x2) = min(2x1 + x2, x1 + 2x2)

a. What is the cost function c(w1,w2, q) for this technology?

b. What is the conditional demand function for factors 1 and 2 as a function of factor
prices (w1, w2) and output q?
 q = f(x1, x2) = min(2x1 + x2, x1 + 2x2)
x2

isoquant = north-
4
east boundary of
this cross
q if w1< w2/2 3
Contingent demand:
[q/3, q] if w1= w2/2
x1(w1, w2, q) = q/3 if ½ < w1/ w2 < 2 2

[0, q/3] if w1=2w2

1
0 if w1>2w2
x1
1 2 3 4
11.1
John’s Lawn Moving Service is a small business that acts as a price taker (i.e., MR= P). The prevailing market price
of lawn mowing is $20 per acre. John’s costs are given by
total cost = 0.1q2+ 10q + 50,
where q = the number of acres John chooses to cut a day.

a. How many acres should John choose to cut in order to maximize profit?

b. Calculate John’s maximum daily profit.

c. Graph these results and label John’s supply curve.

a.
Setting yields

b.

c.