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Economics 6090 Problem Set #4 Overview

The document outlines Problem Set #4 for Economics 6090 at Cornell University, focusing on various economic concepts including demand functions, utility maximization, production functions, and cost minimization. It presents several problems requiring analysis of demand systems, production possibility sets, and the impact of expert hiring on production efficiency. Students are tasked with demonstrating theoretical principles through mathematical derivations and explanations related to consumer and firm behavior in economics.

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Nahim Zahur
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12 views2 pages

Economics 6090 Problem Set #4 Overview

The document outlines Problem Set #4 for Economics 6090 at Cornell University, focusing on various economic concepts including demand functions, utility maximization, production functions, and cost minimization. It presents several problems requiring analysis of demand systems, production possibility sets, and the impact of expert hiring on production efficiency. Students are tasked with demonstrating theoretical principles through mathematical derivations and explanations related to consumer and firm behavior in economics.

Uploaded by

Nahim Zahur
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

Economics 6090 Professor David Easley

Fall 2015 Cornell University

Problem Set #4

Due in TA section Friday, October 23

1. How would you determine whether the function

2 px w
x ( p x , p y , w) =
p x2 + p 2y

can be a demand function for good x for a utility maximizing consumer with preferences defined over goods
x and y ? Is it a demand function? [ p x and p y are the prices of goods x and y and w is the consumer’s
wealth.]

2. Can the following two commodity demand system be generated by a utility maximizing consumer? If
so construct a utility function for the consumer. If not, explain why not.

2w w
x= , y= .
2 px + p y 2 px + p y

3. Problem 4.B.2

4. Show that if the production possibility set is convex, the technology cannot exhibit increasing
returns to scale. Is a convex input requirement set compatible with increasing returns?

5. y ax1α x21−α + bx1 + cx2 , for 0 < α < 1 is homogeneous


Show that the production function given by =
of degree one. Derive the marginal products for x1 and x2 and show that they are homogeneous of degree
zero.

6. Suppose a firm has two plants in which output can be produced using capital (K) and labor (L) as
inputs. Plant 1 uses the production function y1 = K1α L11−α where 0 < α < 1 / 2 and the subscript 1 indicates
inputs and output in plant 1. Plant 2 uses the production function y2 = K 2β L12− β where 0 < β < 1 / 2 and the
subscript 2 indicates inputs and output in plant 2. Suppose the firm wishes to produce y > 0 , where
=
y y1 + y2 , units of output at minimum cost. Will it use both plants to produce its output? Explain clearly the
reasons for your answer.
7. Alpha Corporation, a competitive firm, produces output Z according to the production function
Z = f(K,L), where K denotes capital and L denotes labor. Denote the price of Z by p, the price of L by w, and
the price of K by r. If Alpha purchases K units of capital and does not hire an "expert" to explain the
operation of the capital, then a > 0 units of capital are wasted and the effective capital available is K- a
units. If Alpha hires an expert of type y (y ∈ [0,1] ), then if Alpha buys K units of capital, K - a y units of
capital are available for production, and Alpha must pay the expert c(y) for his service. Since a type y' expert
is more helpful than a type y" expert if and only if y' < y", we assume c( y ) > 0 , c ′ ( y ) < 0 and c ′′ ( y ) > 0
for all 0 < y < 1.

(a) Write out the objective function for Alpha. For the remainder of the problem suppose that the firm uses
both capital and labor, and that it hires an expert.
(b) Prove that the optimal type of expert, y, is independent of the production function and of the price of labor,
and that it varies inversely with the price of capital.
(c) Explain why the optimal y is independent of f and w. Your explanation should be an argument that
anyone who has taken a Principles of Microeconomics course could understand.

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