Problem Set 2

Microeconomic Theory:
ducers Problem1 )

9. A firm has a cost function:

(
y 2 + 1, if y > 0
c(y) =
0,
if y = 0

A Mathematical Approach (Pro-

1. The production function of car is given by f (x1 , x2 ) =

x1 + x2 (assume competitive input and output markets).

Let p be the price of output, and let the factor prices

be fixed. If p = 2 how much will the firm produce? If
p = 1 how much will the firm produce? What is the profit
function of the firm? (Hint: be careful!)

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(a) Find the short run cost function (let input 2 be fixed
in short run) and the long run cost function.
10. A firm uses four inputs to produce one output. The
production function is f (x1 , x2 , x3 , x4 ) = min{x1 , x2 } +
(b) Derive the profit function, supply function and input
min{x3 , x4 }.
demand functions.
2. A firm has two plants with cost functions c1 (y1 ) =
c2 (y2 ) = y2 . Find the cost function for the firm.

(a) What is the vector of conditional factor demands to

produce 1 unit of output when the factor price vector
if w = (1, 2, 3, 4)?
(b) What is the cost function?
(c) What kind of returns to scale does this technology
exhibit?
(d) Another firm has a production function
f (x1 , x2 , x3 , x4 ) = min{x1 + x2 , x3 + x4 }. What is
the vector of conditional factor demands to produce
1 unit of output when prices are w = (1, 2, 3, 4)?
(e) What is the cost function for this firm?
(f) What kind of returns to scale does this technology
represent?

y12
and
2

3. A firm has two plants. One plant produces output according to the production function xa1 x1a
. The other plant
2
has a production function xb1 x1b
.
What
is the cost func2
tion for this technology?

4. Suppose that the firm has two possible activities to produce output. Activity a uses a1 units of good 1 and a2
units of good 2 to produce 1 unit of output. Activity b
uses b1 units of good 1 and b2 units of good 2 to produce
1 unit of output. Factors can only be used in these fixed
proportions. If the factor prices are (w1 , w2 ), what are
11. Compute the cost function for the production function
the demands for the two factors? What is the cost funcf (x1 , x2 , x3 ) = x1 + min{x2 , x3 }
tion for this technology? For what factor prices is the cost
function not differentiable?
12. Compute the cost function and conditional
p factor demands
for the production function f (x1 , x2 ) = (ax1 + bx2 ), for

5. A firm has two plants with cost functions c1 (y1 ) = 4 y1

a > b > 0. Also find the profit function and the supply

and c2 (y2 ) = 2 y2 . What is its cost of producing an

function.
output y?
13. The economy on the island of Bacchus produces only
grapes and wine. The production of 1 pond of grapes
6. The following table shows two observations on factor de1
mand x1 , x2 , factor prices, w1 , w2 , and output, y for a firm.
requires pounds of grapes, 1 laborer, and no wine. The
2
Is the behavior depicted in this table consistent with cost
1
minimizing behavior?
production of 1 liter of wine requires pounds of grapes,
2
1
1 laborer, and liter of wine. The island has 10 laborers
Obs
y
w1 w2 x1 x2
4
who all together demand 1 pound of grapes and 3 litres
A
100
2
1
10 20
of wine for their own consumption. Write out the inputB
110
1
2
14 10
output system for the economy of this island. Can you
solve it?
7. A firm has a production function given by 14. Suppose that there are J single-output plants. Plant js
average cost is ACj (qj ) = + j qj for qj 0. Note that
f (x1 , x2 , x3 , x4 ) = min{2x1 + x2 , x3 + 2x4 }. What
the coefficient is the same for all plants but that the
is the cost function for this technology? What is the
coefficient j may differ from plant to plant. Consider
conditional demand function for factors 1 and 2 as a
the problem of determining the cost-minimizing aggregate
function of factor prices (w1 , w2 , w3 , w4 ) and output y?
production plan for producing a total output of q, where

8. A firm has a production function given by f (x1 , x2 ) =

.
q<
max
j |j |
min{2x1 +x2 , x1 +2x2 }. What is the cost function for this
technology? What is the conditional demand function for
(a) If j > 0 for all j, how should output be allocated
factors 1 and 2 as a function of factor prices (w1 , w2 ) and
among the J plants?
output y?
(b) If j < 0 for all j, how should output be allocated
among the J plants?
1 Also solve the past year exam problems from this topic.
Refer: http://economicsentrance.weebly.com/lessons.html. Contact: econ(c) What if j > 0 for some plants and j < 0 for others?
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