Intermediate Microeconomics

ECON 303 Intermediate Microeconomics II Problem Set #2

Explain why the rental rate of capital reflects the opportunity cost regardless of whether the firm rents its capital or owns it.

1. What is the difference between fixed costs in the short-run and fixed costs in the long-run?

2. If the cost function for a firm is C = 25q2 + 15q

   1. Calculate the average cost.

   2. Calculate the marginal cost.

   3. Does this cost function exhibit any fixed costs?

3. Why does the marginal cost curve intersect the average total cost curve at the minimum of average total cost?

4. Ifw=10andr=2

a. Draw the isocost line for C = 100.
b. DrawtheisocostlineforC=100ifthewageisnoww=5.

1. A firm’s production function is q = K1/2L1/2, the wage is w = 25 and the rental rate of capital is r = 16. Find the optimal amount of K and L if the firm produces 20 units of output.

2. A firm’s production function is q = KL, the wage is w = 25 and the rental rate of capital is r = 9. Find the optimal amount of K and L if the firm produces 100 units of output.