ECO 300 Intermediate Microeconomics

ECO 300 Intermediate Microeconomics, Summer 2016Problem Set 2Due : Thursday, June 9, in classN.B. In general, some questions may be difficult and some may require that you gobeyond the material presented in class. You should try to do the problems and discussthem with other students. Don’t wait until the night before it is due to begin!1. In order to reduce farm output, raise farm prices, and thus raise farm incomes(revenues), the government pays farmers to set aside a portion of their land fromproduction. Explain in terms of the elasticity of demand for farm products whyfarmers may be better-off when harvests are low even if we ignore the money theyreceive from the set-aside program.2. Suppose there are two types of consumers with the respective demand curvesq1 () = −8 + 16, for p < 2, and q 2 () = −3 + 15, for p < 5. If there are 100consumers of type 1 and 50 consumers of type 2, determine the market demandcurve.3. Consider the production function f(L,K)=L+K. Suppose K is fixed at 2. (a) Findalgebraic expressions for the total product of labor function TP(L), the averageproduct of labor AP(L), and the marginal product of labor MP(L). (b) Graph thefunctions in part a. Does your answer to part b violate the rule describing therelationship between average and marginal values? Explain.4. For each of the following production functions, determine if the technology exhibitsincreasing, decreasing, or constant returns to scale.a. f(L, K) = 2 +b. f(L, K) = √ + L + Kc. f(L, K) = √ + 25. For each of the following total cost curves, determine if the technology exhibitsincreasing, decreasing, or constant returns to scale.a. TC(q) = q2b. TC(q) = √c. TC(q) = 2q + 4-1-ECO 300 Intermediate Microeconomics, Summer 20166. A competitive firm has a short-run total cost curve STC(q) = 0.1q2 + 10 + 40a. Identify SVC and SFC.b. Find and plot the SAC and SAVC curves.c. For this function, the SMC curve is given by SMC(q) = 0.2q + 10. Includethis curve in your diagram ford. Write the equation for the firm’s short-run supply curve and indicate it inthe above graph.e. Find the firm’s break-even price and its shut-down price.7. Draw a (standard) U-shaped SAC curve, U-shaped SAVC curve, and upwardsloping SMC curve for a perfectly competitive firm. Indicate the firm’s short-runsupply curve. What will be the effect of an increase in fixed costs on the firm’s supplycurve and on its profits?-2-

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