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INTERMEDIATE MICROECONOMICS
ECON 3550/5030
DR. JEWELL
HOMEWORK #3
1.) Assume that a firm can produce an output using only labor and capital. Economic theory
suggests that the total product curve for this firm will have a specific shape. What is this
shape? Carefully explain why the curve takes this shape and define all terms used. Graph an
example of a total product curve. How is the shape of the total product curve related to the
shapes of the average and marginal product curves?
2.) In a production process, is it possible to have diminishing returns to an input and increasing
returns to scale? Why or why not? Fully explain the difference between these two concepts.
3.) If the total product curve is a straight line through the origin, what do the average product and
marginal product curves look like? Why do we not expect the curves to take these shapes?
4.) In general, we expect a firm’s short- and long-run cost curves to be U-shaped. Carefully
describe where these shapes come from. Explain how one would derive the firm’s short-run
cost curves.
5.) Page 167, #4
6.) Page 167, #8
7.) Page 168, #10
8.) The Donner Family Restaurant produces meals with the following production function:
M = 10K1/4*L1/2
They are currently using a fixed 81 units of capital and they can vary the amount of labor they
use. PK = 10. PL = 30.
a. If L = 25, what is their MRTSLK?
b. Given their production function, generate the firm’s AVC function.
9.) Peggy’s flooring store currently uses 10 units of capital and 50 units of labor. With this input
mix in the short run, the MPK = 36 and the MPL =20 and she is producing a total 600 units of
output per day. The price of capital is $18 per hour and the price of labor is $6 per hour.
a. What is the slope of isoquant curve at the current input mix?
b. What is the slope of isocost curve?
c. Is she currently on her expansion path? How do you know?
d. Sketch an isoquant-isocost diagram that illustrates the situation described here. Clearly
label all relevant parts of your diagram.
e. Assume Peggy has hired you as her economic advisor. Explain to her how she can lower
her cost of producing 600 units by changing her input mix.