03 Jun Question ESSAY. Write your answer on a separate sheet of paper.
Question
ESSAY. Write your answer on a separate sheet of paper.
1) 20 Points
Apu’s Squishy production function is y(K, L) = K L where K is the number of squishy machines and L is the
number of labor hours he employs. Does this production function exhibit increasing, decreasing or constant
returns to scale? (5 Points) At the moment, Apu uses 2 squishy machines and 4 labor hours. Suppose that Apu
can use any amount of either input without affecting the market costs of the inputs. If Apu increased his use of
labor hours and squishy machines by 100%, how much would his production increase? (5 Points) Increasing
the use of both inputs by 100% will result in Apu’s costs increasing by exactly 100%. If Apu increases his use of
all inputs by 100%, what will increase more his production or his costs? (5 Points) Given that Apu can sell as
many squishies as he produces for $1.00, do his profits go up or down when he increases his input use by
100%?(5 Points)
2) (20 Points)
May enjoys spending her free time with her friends at the mall and solving problems from her microeconomics
3 P 1/4
text. She has 16 hours per week of free time. Diagram May’s time constraint. (5 Points) If MUF =
and
4 F
1 F 3/4
MUP =
where F is her time spent with friends at the mall and P is her time spent working problems,
4 P
how much time should May spend at each activity? (15 Points)
3) (20 Points)
The demand curves for steak, eggs, and hot dogs are given in the table below. The current price of steak is $5.
The price of eggs is $2.50, and the price of hot dogs is $0.75. Fill in the remaining columns of the table using this
information. Indicate which goods are substitutes and which goods are complements.
Good
Demand Equation
Steak
1
DS = 500 – 2PS P + PH
10 E
Egg
Steak Price
Elasticity of
Demand
1
DE = 75 – 3PE – PS +
P
10 H
Hotdog
DH = 300 –
1
1
P + PS +
P
2 H
10 E
1
Egg Price
Elasticity of
Demand
Hotdog Price
Elasticity of
Demand
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