ME Tutorial 11

Q1. Suppose the hourly wage is $10 and the price of each unit of capital is $25. The price of output is constant
at $50 per unit. The production function is
Q = L1/2K1/2
If the current capital stock is fixed at 1,600 units, how much labor should the firm employ in the short run?
How much profit will the firm earn?

Q2. Marginal Product schedule of a firm at various levels of inputs is given below:
No. of Units 1 2 3 4 5 6
Labor 144 96 60 48 36 24
Capital 120 84 60 30 20 10
The wage rate is Rs.12 and cost of capital is Rs.6. If budget of the firm is Rs.60, what will be the optimum
labor and capital to be employed by the firm?

Q3. Let the price of labor per unit be equal to Rs. 10 and of capital be Rs. 100. The firm has a production
function Q = 10LK. Then
i. What factor combination is optimally used for output levels of 100Q, 200Q and 300Q?
ii. What is the minimum cost in each case?
iii. Construct an expansion path with 100Q, 200Q and 300Q. Draw proper isoquant and isocost corresponding
to all three production level.

ME Tutorial 11
Q1. Suppose the hourly wage is $10 and the price of each unit of capital is $25. The price of output is constant
at $50 per unit. The production function is
Q = L1/2K1/2
If the current capital stock is fixed at 1,600 units, how much labor should the firm employ in the short run?
How much profit will the firm earn?

Q2. Marginal Product schedule of a firm at various levels of inputs is given below:
No. of Units 1 2 3 4 5 6
Labor 144 96 60 48 36 24
Capital 120 84 60 30 20 10
The wage rate is Rs.12 and cost of capital is Rs.6. If budget of the firm is Rs.60, what will be the optimum
labor and capital to be employed by the firm?

Q3. Let the price of labor per unit be equal to Rs. 10 and of capital be Rs. 100. The firm has a production
function Q = 10LK. Then
i. What factor combination is optimally used for output levels of 100Q, 200Q and 300Q?
ii. What is the minimum cost in each case?
iii. Construct an expansion path with 100Q, 200Q and 300Q. Draw proper isoquant and isocost corresponding
to all three production level.
Solutions:

Q1. Use formulae: P * MPL = w

After solving we will get L = 10,000 and
Profit = TR TC = P*Q (wL+rK) = 60,000

Q2. The maximum product rule is given by MPL/w = MPK/r. This equation stands true only
when the firm employs 3 units of labor and 4 units of capital. Budget: 12 3 + 6 4 = Rs.60.

Q3.
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