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Cost Functions and Production Analysis

The document presents a problem set focusing on cost functions, production functions, and marginal products in economics. It includes questions about avoidable and unavoidable fixed costs, short-run and long-run cost minimization, and comparisons of marginal productivity between two firms. The problems require calculations and intuitive reasoning regarding changes in input levels and prices.

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2 views1 page

Cost Functions and Production Analysis

The document presents a problem set focusing on cost functions, production functions, and marginal products in economics. It includes questions about avoidable and unavoidable fixed costs, short-run and long-run cost minimization, and comparisons of marginal productivity between two firms. The problems require calculations and intuitive reasoning regarding changes in input levels and prices.

Uploaded by

manasmi2537
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

PROBLEM SET 4

1. Consider the following total cost function.

TC(q) = 200 for q = 0


500 + (1/2).q2 for all q > 0

What are the magnitudes of the avoidable and the unavoidable fixed costs? In what scenarios
do you think a firm will have both avoidable as well as unavoidable fixed costs?

2. Recall the example of the commodity manufacturer presented in class. In that example,
consider the case where the parameter values are: a= 0.25, b = 0.25, n = 5000, k = 90, w = 10.

(i) First, consider the short-run cost minimization problem on 1st April. Suppose that on that
day, the firm is sitting with the following pre-contracted amounts of N and K: N = 1, and
K = 300. Determine the ‘short-run (i.e., within quarter) monthly cost function’ of the firm on
April 1st. Also determine the ‘short-run marginal product of labour’ function. Intuitively, in
what ways would these functions be different in each of the following cases?
(a) The amount of pre-contracted K was a little larger than 300, and
(b) the hourly wage rate was a little higher than 10.

(ii) Next, determine the ‘long-run (i.e., within year) monthly supply function’ of the firm as
determined on January 1. Intuitively, in what ways would this cost function be different in
each of the following cases?
(a) The input price of land was a bit higher than 5000, and
(b) the capital productivity coefficient a was a bit lower than 0.25?

(iii) At what output level will the total short-run costs (as determined in part (i)) equal the
total long-run costs (as determined in part (ii))? Why?

3. The production function of bricks (BX) using capital (K) and labour (L) in Firm X is:
BX = 10[+(K×L)]. Find firm X’s ‘marginal product of capital’ at the input combination
(K=100, L=100). The production function of bricks (BY) using capital (K) and labour (L) in
Firm Y is: BY = (K×L). Find firm Y’s ‘marginal product of capital’ at the input combination
(K=100, L=100). Are the ‘capital marginal productivity’ values identical for firms X and Y?
Are their brick production functions identical?

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