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Problem Set 6

The document presents Problem Set 6 for an Economics course, focusing on cost minimization and cost curves through various problems involving production functions, cost calculations, and economic scenarios. It includes specific tasks such as determining short-run cost functions, finding cost-minimizing quantities of labor and capital, and analyzing production costs related to a wine bar. Additionally, it prompts critical thinking regarding the implications of increased wine consumption in a country.

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Ahmed Qayyum
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3 views2 pages

Problem Set 6

The document presents Problem Set 6 for an Economics course, focusing on cost minimization and cost curves through various problems involving production functions, cost calculations, and economic scenarios. It includes specific tasks such as determining short-run cost functions, finding cost-minimizing quantities of labor and capital, and analyzing production costs related to a wine bar. Additionally, it prompts critical thinking regarding the implications of increased wine consumption in a country.

Uploaded by

Ahmed Qayyum
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 2A - Problem Set 6

Cost minimization and cost curves


Vladimir Maltsev
2024

Problem 1. A video game company Snowstorm hires game designers (D) and quality control
assessors (A). Snowstorm’s production function is Q = D1/2A1/2, where Q is the number of games
developed per year, D is the number of game designers hired per year, and A is the number of
quality control assessors hired per year.
a) Suppose Snowstorm already hired 16 quality control assessors this year and cannot hire
anymore. Assume wD to be the annual salary of game designers, and wA to be the annual salary of
quality control assessors. Find the short-run cost function for Snowstorm.
b) Assume that wD is 5,000 and wA is 4,000. What is the total cost of developing 16 games a year?

Problem 2. In country X, the market capital rental rate (r) is 20, and market wage (w) is 10. Firms
can hire however many units of labor and capital at the market rate. For each of the production
functions below, find the cost-minimizing quantity of capital (K) and labor (L) needed to produce
40 units of output.
a) f(K,L) = 10K + 4L
b) f(K,L) = min{10K, 4L}
c) f(K,L) = K2/3L1/3

Problem 3
a) Fill in the following table. Note that in the case of marginal costs, the value to be filled in for
the row corresponding to output=x is the marginal cost of producing the x-th unit. For example,
the value to be filled in when output is equal to one is the marginal cost of producing the first unit.
Y TC FC VC AFC AVC ATC MC
0
1 148
2 64 28
3 66
4 224
b) Why are production costs not measured in terms of labor hours?
Problem 4
François wants to open a wine bar in Glasgow but needs to find some retail space first. The street
where he wants to work has three available locations for rent. The first is 300 square feet, the
second is 600 square feet, and the third is 1,200 square feet. Rent is based on size and is charged
at a monthly rate of £4 per square foot. François’ variable costs are VC=Y2/A, where Y represents
his total production of cheese and wine, while A is the area of his bar, measured in square feet.
a) For each of the area sizes (300, 600 and 1,200 square feet) find the level of production at which
François will minimize his average total cost. For each of these levels, find the average total cost.
b) Draw the average cost curves and marginal cost curves for each of the retail area sizes.
c) Let’s engage in a thought experiment related to wine in general. Assume that the Ministry of
Health in Country X announces that wine consumption in the country in the past twenty years rose
from 5 liters to 15 per person. Can you find both the good and the bad economic news in this
statement?

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