ME Problem Set – IV

PGP 2020 - 22
(Answer Keys)

1. The tangency condition implies

 L1/ 2  K 1/ 2  K 1/ 2  L1/ 2  K 1/ 2  L1/ 2


r w
1 1

r K w L
w L r K
K w2

L r2
Given that w  10 and r  1 , this implies

K
100 
L
100 L  K

Returning to the production function and assuming Q  121, 000 yields

2
121, 000   L1/ 2  K 1/ 2 
2
121, 000   L1/ 2  (100 L)1/ 2 
2
121, 000   L1/ 2  10 L1/ 2 
2
121, 000  11L1/ 2 
121, 000  121L
1, 000  L

Since K  100 L , K  100(1000)  100, 000 . The cost minimizing quantities of capital and
labor to produce 121,000 airframes is K  100, 000 and L  1, 000 .

2. a) Suppose that the firm is operating in the short run, with L = 80. To produce
Q = 8000, how much K will it require? From the production function we
observe that 8,000 = K2 (80) => K = 10.
The total cost would be C = wL + rK = $200(80) + $400(10) = $2,000 per day.
b) Let’s examine the “bang for the buck” for K and L when K = 10 and L = 80.
For capital: MPK / r = 2KL / 400 = 2(10)(80) / 400 = 4

1
For labor: MPL / w = K2 / 200 = 102 / 200 = 0.5
So the marginal product per dollar spent on capital exceeds that of labor. The firm
would like to rent more capital and hire fewer workers.
c) Because the production function is Cobb-Douglas, we know that it has diminishing
MRTSL,K and that the isoquants do not intersect either the K or L axis. Thus the cost
reducing basket (K,L) will be interior (with K > 0 and L > 0). To find the optimum,
we use the two conditions:
(1) Tangency condition: MPK / MPL = r / w => 2KL/K2 = 400 / 200 => K
=L
(2) Production Requirement: K2L = 8,000
Together equations (1) and (2) tell us that K = 20 and L = 20.
The total cost would be C = wL + rK = $200(20) + $400(20) = $12,000 per day.

3. a) First, note that this production function has diminishing MRSL,K. The tangency
condition would imply that 1/2 √ L=1 /50 or L = 625. Substituting this back into
the production function we see that K = 10 – 25 = –15. Since the firm cannot use a
negative amount of capital, the tangency condition is not valid in this case.
Looking at the corner with K = 0, since Q = 10 the firm requires L = Q2 = 100 units of labor.
At this point, MPL / w = (1/20)/1 = 0.05 > MPK / r = 1/50 = 0.02. Since the marginal product
per dollar is higher for labor, the firm will use only labor and no capital.

MP L MP K
=
b) The firm will use a positive amount of capital when w r , or 2 √ L=r.

Thus L = 0.25r2. From the production constraint K = Q−√ L = 10 – 0.5r. So if K > 0

then we must have 10 – 0.5r > 0, or r < 20.

c) Again, using the tangency condition we must have 2 √ L=r. Therefore, since r =
50, L = 625. From the production constraint, the input demand for capital is K = Q−√ L =
Q – 25. So if K > 0 then we must have Q > 25.

4. a) Here we have two tangency conditions and the requirement that L , K , and M
produce Q units of output.

2
 1 2 1
MPL w 1
K 3L 3M 3 1
  3 1 1 2   M  L
MPM m 3 K L M
1 3 3 3 1
1 2 1
MPL w 1
K 3L 3M 3 1
  3 2 1 1   K  L
MPK r 3 K
1 3
L3 M 3 1
1 1 1
Q  K 3 L3 M 3

This is a system of three equations in three unknowns. The solution to this system gives us
the long-run cost-minimizing input combination:

LQ
M Q
K Q

MPL
 w
b) The tangency condition MPM m
is
1
2 1
1
K 3L 3M 3 1
3
1  ,
1
K LM3
1
3
 32 1
3

which implies

M L

To find the short-run cost-minimizing quantity of labor, we plug this back into the production
function and solve for L in terms of Q and K .

1 1 1
Q  K 3 L3 L3

which when we solve for L gives us the short-run cost-minimizing quantity of labor

3
Q2
L 1

K2

Since M  L , the short-run cost-minimizing quantity of materials is

3
 3
Q2
M 1

K2

c) Plugging Q  4 into the expressions for the long-run cost-minimizing quantities of

labor and materials gives us
L4
M 4

Plugging Q  4 and K  4 into the expressions for the short-run cost-minimizing quantities
of labor and materials gives us

3
42 ( 32  12 )
L 1 4 4
4 2

3
42 ( 32  12 )
M 1 4 4
4 2

5. a) Equating the bang for the buck between labor and capital implies
MPL w

MPK r
KM 5

LM 1
K  5L

Equating the bang for the buck between labor and materials implies

MPL w

MPM m
KM 5

KL 2
5L
M
2

Plugging these into the production function yields

4
  5L 
Q  L(5 L)  
 2 
3
25 L
Q
2
2Q
L3 
25
1/ 3
 2Q 
L 
 25 

Substituting into the tangency condition results above implies

1/ 3
 2Q 
K  5 
 25 

and

1/ 3
5  2Q 
M  
2  25 

b)
1/ 3 1/ 3 1/ 3
 2Q   2Q   5  2Q 
TC  5    5   2   
 25   25   2  25 
1/ 3
 2Q 
TC  15  
 25 

c)
1/ 3
TC 15  2Q 
AC    
Q Q  25 

d) Beginning with the tangency condition

MPL w

MPM m
KM 5

KL 2
5L
M
2

Setting K  50 and substituting into the production function yields

5
  5L 
Q  L(50)  
 2 
Q  125 L2

Q
L
125

Substituting this result into the tangency condition result above implies

Q
5
M  125
2
Q
M
20

e) In the short run,

Q Q
TC  5  50  2
125 20
Q
TC  2  50
5

f) Short run average cost is given by

Q
2  50
TC 5
AC  
Q Q

6. a) Starting with the tangency condition we have

MPL w

MPK r
 L1/ 2  K 1/ 2  L1/ 2 2

 L1/ 2  K 1/ 2  K 1/ 2 1
K
4
L
K  4L
Plugging this into the total cost function yields

6
 2
Q   L1/ 2  (4 L)1/ 2 
2
Q  3L1/ 2 
Q  9L
Q
L
9

Inserting this back into the solution for K above gives

4Q
K
9

b)
 Q  4Q
TC  2   
9 9
2Q
TC 
3

c)
TC  2Q 
AC    Q
Q  3 
2
AC 
3

d) When Q  9 the firm needs no labor. If Q  9 the firm must hire labor. Setting
K  9 and plugging in for capital in the production function yields
2
Q   L1/ 2  91/ 2 
Q1/ 2  L1/ 2  3
L1/ 2  Q1/ 2  3
2
L  Q1/ 2  3

Thus,
 Q 12  3 2 if Q  9
L   
0 if Q  9

e)
2  Q1/ 2  3 2  9 when Q  9
TC  
9 when Q  9

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f)
 2  Q1/ 2  3 2  9
 if Q  9
TC  Q
AC  
Q 9
Q if Q  9
