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ECO101: Introduction To Economics (Summer Semester, 2019) Tutorial Problem Set - 02

This document provides an example problem set for an introductory economics course. It includes 9 practice problems covering topics like consumer choice, demand curves, price changes, production functions, costs of living indexes, returns to scale, and factor demand. The problems range from deriving equations and drawing graphs to calculating numerical values and analyzing production scenarios. Overall, the problem set provides students various opportunities to apply core economic concepts.

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Shubham Kumar
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61 views

ECO101: Introduction To Economics (Summer Semester, 2019) Tutorial Problem Set - 02

This document provides an example problem set for an introductory economics course. It includes 9 practice problems covering topics like consumer choice, demand curves, price changes, production functions, costs of living indexes, returns to scale, and factor demand. The problems range from deriving equations and drawing graphs to calculating numerical values and analyzing production scenarios. Overall, the problem set provides students various opportunities to apply core economic concepts.

Uploaded by

Shubham Kumar
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
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ECO101: Introduction to Economics (Summer Semester, 2019)

Tutorial Problem Set – 02

1. A consumer has a budget of I = 16 to use for goods x and y. The initial prices are
Px = Py = 1. Her preferences can be described with a Cobb-Douglas utility function,
U(x, y) = xy which gives rise to the following demand functions:
x(Px , Py , I ) = I/2Px and : y(Px , Py , I ) = I/2Py.
(a) What is the optimal consumption bundle, and the level of utility that the
consumer reaches with this bundle?
(b) If the price of x increases to Px = 4, what is the new optimal consumption
point? Given the new prices, determine what is the new income required to
reach the original level of utility, and what would be the optimal consumption
point in this case.
(c) What are the income and substitution effect of the price change?

2. Carina buys two goods, food F and clothing C, with the Utility function U=FC+F. Her
marginal utility of food is MUf= C+1 and her marginal utility of clothing is MUc =F.
She has an income of $20. The price of clothing is $4.
(a) Derive the equation representing Carina’s demand for food, and draw this
demand curve for prices of food between 1 and 6.
(b) Calculate the income and substitution effects on Carina’s consumption of food
when the price rises from 1 to 4, and draw a graph illustrating these effects.
Your graph does not need to be to scale, but it should be consistent with the
data.
(c) Determine the numerical size of the compensating variation (in monetary
terms) associated with the increase in the price of the good from 1 to 4.
3. The utility that Meredith receives by consuming food F and clothing C is given by
U(F,C) = FC. Suppose that Meredith’s income in 1990 is $1200 and that the prices of
food and clothing are $1 per unit for each. By 2000, however, the price of food has
increased to $2 and the price of clothing to $3. Let 100 represent the cost of living
index for 1990. Calculate the ideal and the Laspeyres cost-of-living index for
Meredith for 2000. (Hint: Meredith will spend equal amounts on food and clothing
with these preferences.)
4. Do the following functions exhibit increasing, constant, or decreasing returns to
scale? What happens to the marginal product of each individual factor as that factor is
increased and the other factor held constant?
(a) q=3L+2K
(b) q=(2L+2K)1/2
(c) q= (LK)1/2

5. Suppose that the production function for DVDs is given by Q=KL2 – L3, where Q is
the number of disks produced per year, K is machine‐hours of capital, and L is man
hours of labor. Suppose K=600. Find the total product function and graph it over the
range L=0 and L=500. Then sketch the graphs of the average and marginal product
functions. At what level of labor L does the average product curve appear to reach its
maximum? At what level does the marginal product curve appear to reach its
maximum?

6. The marginal product of labor in the production of computer chips is 50 chips per
hour. The marginal rate of technical substitution of hours of labor for hours of
machine capital is 1/4. What is the marginal product of capital?

7. Suppose the production of digital cameras is characterized by the production function


Q = LK, where Q represents the number of digital cameras produced. Suppose that the
price of labor is $10 per unit and the price of capital is $1 per unit.
(a) Graph the isoquant for Q = 121,000. On the graph you drew for part a, draw
several isocost lines including one that is tangent to the isoquant you drew.
What is the slope of the isocost lines?
(b) Find the cost-minimizing combination of labor and capital for a manufacturer
that wants to produce 121,000 digital cameras. Mark this point on the graph
you drew for part a.

8. A firm has the following production function: Q: L1/3K1/2.


(a) Does this production function exhibit increasing, decreasing, or constant
returns to scale?
(b) Suppose in SR capital is fixed at K = 100. Find firm’s unconditional factor
demand for labour
(c) Find firm’s unconditional factor demands in the long run. 5.
9. A firm has the following production function: Q: L1/3K1/2.
(a) Does this production function exhibit increasing, decreasing, or constant
returns to scale?
(b) Suppose in SR capital is fixed at K = 100. Find firm’s unconditional factor
demand for labour
(c) Find firm’s unconditional factor demands in the long run.

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