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Exercises for Tutorials

1. Derive the profit function (p, w) and supply function y(p, w) for the single-output
technologies whose production functions f (x) are given by

(a) f (x) = x1 + x2 .
p
(b) f (x) = min{x1 + x2 },
(c) f (x) = (x1 + x2 )1/ , for < 1.
2. Derive the cost function c(w, y) and conditional factor demand functions x(w, y) for each
of the following single-output constant return technologies with production functions
given by
(a) f (x) = x1 + x2 (perfect substitutable inputs)
(b) f (x) = min{x1 + x2 } (Leontief technology)
(c) f (x) = (x1 + x2 )1/ , for < 1 (constant elasticity of substitution technology)
3. Let y the level of output at which the average cost function, AC(w, y)
minimum. Show that

AC(w,
y)
y

c(w,
y)
y

c(w,y)
y ,

is

at y.

4. Suppose that a firm can produce good y from n factor inputs (n > 1). Factor prices are
w and the price of output is p. The firms differentiable cost function is c(w, y). Assume
that this function is strictly convex in y. However, although c(w, q) is the cost function
when all factors can be freely adjusted, factor 1 cannot be adjusted in the short run.
Suppose that the firm is initially at a point where it is producing its long-run profit
maximizing output level of good y given prices w and p, y(w, p) i.e., the level that is
optimal under the long-run cost conditions described by c(w, y), and that all inputs
are optimally adjusted i.e., xi = xi (w, y(w, p)) for all i = 1, . . . , n, where xi (w, y(w, p))
is the long-run input demand function. Show that the firms profit-maximizing output
response to a marginal increase in the price of good y is larger in the long run than in
the short run.
5. Suppose there are two goods; an input x and an output y. The production function
is y = f (x), We assume that f (x) exhibits increasing returns to scale and that f (x)
is differentiable. Do the increasing returns of f (x) imply that the average product is
necessarily non-decreasing in input? What about the marginal product?