03 Jun Question Problem Set #2 1. Draw a graph showing a set of i
Question
Problem Set #2
1. Draw a graph showing a set of isoquants that depict capital and labor to be perfect
complements (not substitutable at all) in a production function that exhibits constant
returns to scale. Be sure to label the input and output levels on the isoquants.
2. According to Haskel and Sadun(2009), the United Kingdom started regulating the size of
grocery stores in the early 1990s, and today the average size of a typical U.K. grocery
store is roughly half the size of a typical U.S. store and two-thirds the size of a typical
French store. What implications would such a restriction on size have on a stores
average costs? Discuss in terms of economies of scale and scope..
3. A glass manufacturers production function is
(based on Hsieh, 1995). Its
marginal product functions are
and
. Suppose that its wage, w, is $1 per hour and the rental cost of capital, r, is $4.
a. Draw an accurate figure showing how the glass firm minimizes its cost of production.
b. What is the equation of the (long-run) expansion path for a glass firm? Illustrate this
path in a graph.
c. Derive the long-run total cost curve equation as a function of q.
4. Fierce storms in October 2004 caused TomatoFest Organic Heirlooms Farm to end its
tomato harvest two weeks early. Accoridng to Gary Ibsen, a partner in this small business
(Carolyn said, Tomatoes in Trouble, San Francisco Chronicle, October 29, 2004, C1,
C2), TomatoFest lost about 20,000 pounds of tomatoes that would have sold for about
$38,000; however, because he did not have to hire pickers and rent trucks during these
two weeks, his net loss was about $20,000. In calculating the revenue loss, he used the
post-storm price, which was double the pre-storm price. Did TomatoFest suffer an
economic loss? What extra information (if any) do you need to answer this question?
5. Each firm in a competitive market has a cost function of
, so its marginal
cost function is
. The market demand function is
. Determine the
long-run equilibrium price, quantity per firm, market quantity, and number of firms.
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