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Problem Set 4

The document consists of a problem set for ECO 503 that covers various aspects of production functions, profit maximization, and cost minimization. It includes questions on the relationships between average and marginal products, the behavior of profit functions in relation to prices and wages, and the characteristics of cost functions. Additionally, it presents a scenario involving a price-taking firm that produces electricity with specific demand patterns and a defined production function.

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3 views2 pages

Problem Set 4

The document consists of a problem set for ECO 503 that covers various aspects of production functions, profit maximization, and cost minimization. It includes questions on the relationships between average and marginal products, the behavior of profit functions in relation to prices and wages, and the characteristics of cost functions. Additionally, it presents a scenario involving a price-taking firm that produces electricity with specific demand patterns and a defined production function.

Uploaded by

zsiam14
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

ECO 503 Problem Set 4

1. Let y = f (x1 , x2 ) be a constant returns-to-scale production function. Show that if the average product of x1

is strictly rising, the marginal product of x2 is negative.

2. Suppose the production function f : RL→1


+ → R+ is continuous, strictly increasing and strictly concave.

Assume (p, w) >> 0 and the profit function ω (p, w) is di!erentiable. Show that ω (p, w) is:

(a) Increasing in p.

(b) Decreasing in w.

(c) Convex in (p, w).

3. Let f : RL→1
+ → R+ be an increasing production function, and consider the one-step profit maximization

problem:

max pf (x) ↑ w.x


x

Let x (p, w) be the unconditional factor demand function, assume it is di!erentiable. Using the Monotone
ωxi (p,w) ωxi (p,w)
Comparative Statics Theorem, show that ωwi ↓ 0, ωp ↔ 0 and ωy(p,w)
ωp ↔ 0.

4. Let f : RL→1
+ → R+ be a continuous and strictly increasing production function, with f (0) = 0, and let

C (w, y) be the associated cost function, where w ↗ RL→1


++ , that is, all input prices are strictly positive. Show

that C (w, y) is:

(a) Zero when y = 0.

(b) Strictly increasing in y.

(c) Increasing in w.

(d) Homogenous of degree 1 in w.

(e) Concave in w.

5. A price-taking firm that produces electricity, and must meet all demand it faces. This question is about

cost-minimization, so we can ignore the output price. It turns out that the amount of electricity demanded

is always the same over every 24-hour period, but demand di!ers from day (6:00 A.M. to 6:00 P.M.) to night

1
(6:00 P.M. to 6:00 A.M.). During the day, 4 units are demanded, whereas during the night only 3 units are

demanded. Total output for each 24-hour period is thus always equal to 7 units. The firm produces electricity

according to the following production function:

1
yi = (kFi ) 2 ; i = day, night

Here, k is the size of the electricity-generation plant, and Fi is the amount of fuel. The firm must build a

single plant; it cannot change plant size from day to night. If a unit of plant size costs wk > 0 per 24-hour

period and a unit of fuel costs wf > 0 , what size plant will the utility build?

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