Frida Buck

Huiswerkopdracht 4
Werkgroep 2
Exercise 1
a) Q = 5 K1/2L2/3
f (tK,tL) = 5 (tK)1/2 (tK)2/3 = 5 t1 K1/2L2/3 = t (K,L)
Hence the Cobb-Douglas function exhibits constant returns to scale, because output also
increases by a factor of t.
b) RTSL for K = L/K = [5 (2/3) L-1/3K1/3]/[5 (1/3) K-2/3L2/3]
= [(4/3) K1/3L-1/3]/[(5/3) K-2/3L2/3]
= 2K/L
So the marginal rate of technical substitution of L for K is RTS = 2K/L.
c) RTSL for K = L/K = 2K/L
ln [2K/L] = ln [(2/3)/(1/3)] + ln [K/L]
= ln[k/l]/ln[RTS] = 1
Exercise 2
a) C = q(vw + (vw) + w)
= vq + q (vw) + qw
= vq + q v1/2w1/2 + qw
k = C/v = q + (1/2) v-1/2qw1/2 = q + (qw1/2/2v1/2)
l = C/w = (qv1/2/2w1/2) + q
Exercise 4
Total cost = C = 0.25 q2 = 0.25 (qA + qL)2
qA = 100 2PA
qL = 100 4PL
RA = PA qA = 50qA qA2/2
RL = PL qL = 25qL qL2/4
MRA = 50 qA
MRL = 25 qL/2
MCA = 0.5 (qA + qL)
MCL = 0.5 (qA + qL)
Set MRA = MCA, gives:
50 qA = 0.5 qA + 0.5 qL
Set MRL = MCL, gives:
25 qL/2 = 0.5 qA + 0.5 qL

Solving these two equations simultaneously, gives:

qA = 30
qL = 10
PA = 35
PL = 22.5
Profits = = 1050 + 225 400 = 875
Exercise 5
a) q = 2l
q2 = 4l
l = (1/4)q2
C = wl = w (1/4)q2 = wq2/4
b) Profit maximization gives P = MC.
MC = 2wq/4 = wq/2 P = wq/2
= Pq C = Pq (wq2)/4
= P (2P/w) (w (2P/w)2)/4
= 2P2/w (w ((2P)2/w2)/4
= 2P2/w ((w 4P2)/w2)/4
= 2P2/w (4P2/w)/4
= 2P2/w (4P2/4w)
So the profit function is = 2P2/w P2/w = P2/w
c) P = wq/2 herschrijven, geeft:
wq = 2P
q = 2P/w
So q (P,w) = 2P/w
d) l = (1/4)q2
q = 2P/w invullen, geeft:
l = (1/4) (2P/w)2
= (4P2/w2)/4 = P2/w2
l (P,w) = P2/w2
e) It has been algebraically proven that increases in w reduce quantity supplied at each given
P.
Exercise 6
a) Expected profits = E() = 0.5 [30q C(q)] + 0.5 [20q C(q)] = 25q C(q)
E(P) = 25 determines expected profits.
For profit maximum were setting E(P) = MC = q + 5
E() = E(P)q C(q) = 500 400 = 100

b) In the two states of the world profits are

P = 30 = 600 400 = 200
P = 20 = 400 400 = 0
Expected utility is given by E(U) = 0.5 200 + 0.5 0 = 7.1
c) Output levels between 13 and 19 all yield greater utility than does q = 20. Reductions in
profits from producing less when P is high are compensated for by increases in profits when P
is low.
Optimaliseert zijn situatie in zijn slechte omstandigheden.
E(U) = 0,5 U(piG) + 0.5 U(piB)
= 0.5 x wortel(30q 0,5q^2 5q 100) + 0.5 x wortel(20q-0,5q^2 5q-100)
= ongeveer 16.9
d) P can be predicted. Then set P = MC in each state of the world.
When P = 30, q = 25 and = 212.5
When P = 20, q = 15 and = 12.5
E() = 112.5
E(U) = 0.5 212.5 + 0.5 12.5 = 9.06
So the expected utility has been increased from 7.1 to 9.06.