Question

1. Is this cost function a short-run or long-run cost function? ? = 1 3 ? 3 − ? 2 + 2? + 90 a. Short-run b. Long-run c. There is information to answer question _____

2. The ______illustrates the various combinations of L and K that can produce the same level of output. a. Isoquant b. Isocost c. Expansion path _____

3. For a cost-minimizing firm that chooses the optimal level of L and K, it will always choose to employ more of the input that has a lower per unit cost. a. True b. False _____

4. Does this production function exhibit constant, increasing or decreasing returns to scale? ? = 2?? + ? 2 a. CRS b. IRS c. DRS

Answer 1

1. The given cost function ? = 1 3 ? 3 − ? 2 + 2? + 90 is a short term function in the short run, fixed costs are given and could not be changed. In this case, 90 is the fixed cost and all other components dependent on q are for variable costs.

2.Isoquant is a set of points at which the same quantity of output is produced while changing the quantities of two or more inputs. Therefore, Option (a) is the corect one.

3.The statement is true that for a cost-minimizing firm that chooses the optimal level of L and K, it will always choose to employ more of the input that has a lower per unit cost. The absolute value of the slope of the isocost line, with capital plotted vertically and labour plotted horizontally, equals the ratio of unit costs of labour and capital.

4. The production function q = 2KL + K2 could be rephrased as q = 2K (1 + L). On keeping K constant and increasing L, q increases at a higher rate implying that there is Incresing return to scale (IRS).