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Practice Problems Module 2

The document contains 10 practice questions related to production functions and costs. It provides the questions, production functions, price information, and the answer for each question. The questions calculate things like optimal input levels to minimize costs or maximize output, technical rates of substitution, expansion paths, average and marginal costs, and productivity of inputs.

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63 views2 pages

Practice Problems Module 2

The document contains 10 practice questions related to production functions and costs. It provides the questions, production functions, price information, and the answer for each question. The questions calculate things like optimal input levels to minimize costs or maximize output, technical rates of substitution, expansion paths, average and marginal costs, and productivity of inputs.

Uploaded by

Shivam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ECO201A/ Module 2/ Practice problems/ No submission

Q1. The production function of a f is Q=2L+K, where L stands for labour and K stands for
capital. The price of labour services is ₹4 and price of capital is ₹5 per unit. In short run
firm’s capital is fixed at 9, then find the amount of labour is required to produce 45 unit of
output.
Ans: 18 units.
1 1
Q2. A firm has the production function f ( x , x ) =x 2 x 2 . Suppose that this firm is using 16
1 2 1 2

units of factor 2 and is unable to vary this quantity in the short run. Let the price of the firm’s
output be p, and let the price it pays per unit of factor 1 be w1. What is the amount of output it
will produce?
Ans: 8p/w1
Q3. The technical rate of substitution between factors X1 and X2 is −5. If the firm desire to
produce same amount of output but reduce its X 1 use by 4 units, then how many more unit of
X2 will be required?
Ans: 20 units.
Q4. The production function of a firm is given as: Q=500 L0.6 K 0.8, where Q is the quantity
produced, L and K stands for labour and capital respectively. The wage rate of labour is ₹15
while rental rate of capital is ₹50. Derive the optimal capital labour ratio.
Ans: K/L = 0.4
2
Q5. The production function of a firm is given by Q=( √ X 1 + √3 X 2 ) . The price of X1 is W1 = 1
and price of X2 is W2 = 1.
a. Find the quantity of X1 and X2 use to produce 16 unit of output in cheapest way.
[Hint: set up a cost minimization problem, given output level. From the first order
condition obtain relationship between X1 and X2 and substitute back into production
function at given output level.]
16 144
Ans: X 1 = and X 2 =
100 100
b. What is the minimum cost? [Hint: Substitute the optimal value of X 1 and X2 in the
isocost line]
160
Ans:
100
L K
Q6. If production function is Y =min( , ) where a, b >0 and w and r is the price of per unit
a b
labour and capital respectively. Then what will be the minimum cost of producing Y units of
output?
Ans: C = (aw + br) Y

1
Q7. Consider the following production function Y = L α Kβ where α, β >0. If price of labour
(L) is w and price of capital (K) is r, then derive the equation of the expansion path. [Hint:
Use the first order output maximization conditions]
α w
Ans: K= L
β r
Q8. A firm produces an output (Y) using two inputs capital (C) and labour (L). In short run
the capital becomes the fixed input of the firm. Now consider the following production data
Output [Y] 30 90 130 155 172 185
Labour [L] 1 2 3 4 5 6
Capital [K] 1 1 1 1 1 1
Suppose price of L is ₹60 and price of K is ₹75. Then calculate the average cost of
producing 130 units of output.
Ans: 1.96
Q9. Short run production function of a firm is Y =24 L2−2 L3 . Obtain the maximum marginal
and average productivity of labour.
Ans: Max(MPL) = 96 and Max(APL) = 72.
2 1
Q10. Suppose production function of a firm is given as Q=K 3 L 3 , where Q, K, and L are
used in standard notations. Suppose wage rate is ₹15 and cost of capital is ₹1,920 per unit. If
the firm employs 1 unit capital and 8 unit’s labours. Note that the firm cannot vary the
amount of capital. Then compute the average cost of production and marginal cost of
production of the firm.
Ans: AC: TC/Q = 1,020; MC = W/MPL = 180

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