# Sample Midterm Solutions

Size: px
Start display at page:

Transcription

1 Sample Midterm Solutions Instructions: Please answer both questions. You should show your working and calculations for each applicable problem. Correct answers without working will get you relatively few points. Make sure to put your name and id number on the top of every single piece of paper that you turn in. Also, please write in a page number at the bottom of every piece of paper that you turn in and assemble them sequentially before submitting. Question : Math and Optimization (50%) Consider the Primal problem faced by a producer. Namely, a producer (or firm) can be thought to maximize profits, subject to producing their goods based on a particular kind of technology, or production function. Suppose that production of good y requires two inputs: K (capital) and L (Labor), which have input prices r and w respectively. Furthermore, assume that the firm s price is normalized to, and that the production function is given by a constant elasticity of substitution (CES) production function: [Quick aside: y F K, L K L Just as an aside, and as a point of interest (since some of the papers we may read might use the CES function), here are some of the properties of the function above. As its name suggests, the elasticity of substitution (which in this case would measure the curvature of the production isoquant) is constant for the CES production function. More specifically, the elasticity of substitution measures the percentage change in the factor ratio divided by the percentage change in the technical rate of substitution, whilst holding output fixed. That is: K / L / dln K / L dln K / L K L dk / dl dln dk / dl dln TRS dk / dl

2 The usefulness of the CES production function in replicating different types of production functions becomes apparent as we vary the parameter. For example: Case I: Linear production function: When we set, the production function above becomes: y K L, where the two inputs, capital and labor are perfect substitutes. Case 2: Cobb Douglas production function: When tends to 0, i.e. lim 0 y, the isoquants of the CES production function look very much like those of the Cobb Douglas production function. This can be shown a variety of different ways mathematically, but the easiest is to compute the technical rate of substitution. As such, the two inputs in this case are imperfect substitutes, where the production isoquants are downward sloping. Case 3: Leontieff Production function: When tends to, i.e. lim y, the production isoquants become L shaped, which we associate with the perfect complements case for inputs. End Aside] a. [5 pts] Calculate the partial derivatives of y with respect to K and with respect to L. y K L F z K z K, where z K L K F z L z L L b. [5 pts] Consider that the total derivative of the production function above would be calculated as: F F dy dk dl. The technical rate of substitution measures how one of the inputs must K L adjust in order to keep output constant (i.e. when dy 0 ) when the other changes, and can be

3 dk F / L calculated from the total derivative above as: TRS. Using your answer to dl F / K part (a), calculate the technical rate of substitution for the CES production function above. dk z L L K dl K L TRS z K c. [4 pts] Using your answer from part (b), re write the equation so that you have (K/L) as a function of the TRS. [Hint: take the absolute values of the TRS and then re arrange for (K/L)]]. K TRS L K TRS L d. [4 pts] Take logs of both sides and differentiate to show that the elasticity of substitution is a constant ln K / L ln TRS dln K / L dln TRS dln K / L dln TRS An alternative way to think about the producer s problem is to view it as a firm s choice to produce a certain amount of output, y, and then they wish to minimize the amount of costs needed to produce that amount of output. This is typically the Dual problem to the firm s decisions. e. [6 pts] Given input prices r and w for K and L respectively, write out the Lagrangean for the firm s cost minimization problem for producing an amount of output y. The firm s problem is to min rk KL, wl subject to: K L y. It is actually easier to transform the constraint a bit, so that the production function is now: K L y.

4 As such, the lagrangean for the problem is: L rk wl y K L f. [6 pts] Derive the first order conditions (FOC) for the problem above. L K r K L L w L L K L y 0 0 (I) (II) (III) g. [0 pts] Solve for the optimal values of K and L. Using equations (I) and (II) above, we can eliminate to get the expression that the absolute value of the marginal rate of technical substitution equals the (input) price ratio: K r r K L (IV) L w w We now have an expression for K in terms of L. Finally, by plugging (IV) into (III) (which we have not used up to this point), we can solve for L first and then K as follows: r w L L y L y w r L w w r y L w w r y K r w r y h. [0 pts] Calculate the Value function for the cost function, which is obtained by plugging in the optimal values of K and L that you obtained in part (g) above into the cost function itself.

5 By plugging in the optimal values for K and L into the cost function, we can obtain total costs as a function of the input prices and the level of output the firm wishes to achieve. That is: C r, w, y rk wl r w r yw w r y y r w w r y r y r w w [Notice that the form of the cost function is the same as the original CES production function except with replaced with instead, and the inputs replaced by their factor prices.] Question 2: IS LM question (50%) Consider the following IS LM model: C 200 ( Y T) 4 I 50 Y 000r 4 G 250 T 200 Lr, Y2Y 8000r M 600 P a. [8 pts] Derive the IS equation To get the IS equation, just add up C+I+G as follows: IS : Y 200 Y Y 000r Y 550 Y 000r 2 Y r ()

6 b. [8 pts] Derive the equation for the LM curve. [Hint, you want to write it as interest rates as a function of everything else]. To get the LM equation, just set demand equal to supply for real money balances: M Lr, Y P 600 2Y 8000r 8000r 600 2Y r Y (2) c. [8 pts] Solve for the equilibrium output. [Hint: substitute the LM equation into the IS equation and then solve for output] Y ( Y) Y Y 000 d. [8pts] Solve for the equilibrium interest rate. [Hint: substitute the value you obtained for output in part (c) into either the IS or LM equations, and solve for interest rates. You should get the same number from both if you did the math correctly] Plugging into the LM equation, we get: r r Thus interest rates are 5% in equilibrium. e. [8pts] Calculate the values of consumption and investment in equilibrium. Verify that the sum of C, I and G add up to output. C I ( ) G 250 C I G f. [0 pts] Suppose that the money supply increases to M/P = 840. Solve for Y, r, C and I and describe in words the impact of a monetary expansion. Intuitively, a monetary expansion should impact the LM curve. It should create a surplus of money in the money market and cause interest rates to go down, shifting the LM curve out.

7 The decrease in interest rates should spur investment and output and we would move along the IS curve in the short run. Since output goes up, consumption should too Y 8000r r Y This is the new LM curve. Plugging into the IS curve yields: Y Y C I ( Y ) r Y Thus our observations are verified.

### 19 : Theory of Production

19 : Theory of Production 1 Recap from last session Long Run Production Analysis Return to Scale Isoquants, Isocost Choice of input combination Expansion path Economic Region of Production Session Outline

### Prot Maximization and Cost Minimization

Simon Fraser University Prof. Karaivanov Department of Economics Econ 0 COST MINIMIZATION Prot Maximization and Cost Minimization Remember that the rm's problem is maximizing prots by choosing the optimal

### MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001

MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001 General Equilibrium and welfare with production Wednesday, January 24 th and Monday, January 29 th Reading:

### Productioin OVERVIEW. WSG5 7/7/03 4:35 PM Page 63. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

WSG5 7/7/03 4:35 PM Page 63 5 Productioin OVERVIEW This chapter reviews the general problem of transforming productive resources in goods and services for sale in the market. A production function is the

### Name: ID: Discussion Section:

Math 28 Midterm 3 Spring 2009 Name: ID: Discussion Section: This exam consists of 6 questions: 4 multiple choice questions worth 5 points each 2 hand-graded questions worth a total of 30 points. INSTRUCTIONS:

### Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization

Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization 2.1. Introduction Suppose that an economic relationship can be described by a real-valued

### Cost Constraint/Isocost Line

Cost Constraint/Isocost ine COST CONSTRAINT C= w + rk (m = p 1 x 1 +p 2 x 2 ) w: wage rate (including fringe benefits, holidays, PRSI, etc) r: rental rate of capital Rearranging: K=C/r-(w/r) COST CONSTRAINT

### Problem Set #5-Key. Economics 305-Intermediate Microeconomic Theory

Problem Set #5-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr Cuellar (1) Suppose that you are paying your for your own education and that your college tuition is \$200 per

### 8. Average product reaches a maximum when labor equals A) 100 B) 200 C) 300 D) 400

Ch. 6 1. The production function represents A) the quantity of inputs necessary to produce a given level of output. B) the various recipes for producing a given level of output. C) the minimum amounts

### Production Functions

Short Run Production Function. Principles of Microeconomics, Fall Chia-Hui Chen October, ecture Production Functions Outline. Chap : Short Run Production Function. Chap : ong Run Production Function. Chap

### Constrained optimization.

ams/econ 11b supplementary notes ucsc Constrained optimization. c 2010, Yonatan Katznelson 1. Constraints In many of the optimization problems that arise in economics, there are restrictions on the values

economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

### Microeconomic Theory: Basic Math Concepts

Microeconomic Theory: Basic Math Concepts Matt Van Essen University of Alabama Van Essen (U of A) Basic Math Concepts 1 / 66 Basic Math Concepts In this lecture we will review some basic mathematical concepts

### AP Microeconomics Chapter 12 Outline

I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.

### Deriving Demand Functions - Examples 1

Deriving Demand Functions - Examples 1 What follows are some examples of different preference relations and their respective demand functions. In all the following examples, assume we have two goods x

### Chapter 4 Online Appendix: The Mathematics of Utility Functions

Chapter 4 Online Appendix: The Mathematics of Utility Functions We saw in the text that utility functions and indifference curves are different ways to represent a consumer s preferences. Calculus can

### or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:

Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.

### c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?

Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm

### Macroeconomics Lecture 1: The Solow Growth Model

Macroeconomics Lecture 1: The Solow Growth Model Richard G. Pierse 1 Introduction One of the most important long-run issues in macroeconomics is understanding growth. Why do economies grow and what determines

### Costs. Accounting Cost{stresses \out of pocket" expenses. Depreciation costs are based on tax laws.

Costs Accounting Cost{stresses \out of pocket" expenses. Depreciation costs are based on tax laws. Economic Cost{based on opportunity cost (the next best use of resources). 1. A self-employed entrepreneur's

### Profit and Revenue Maximization

WSG7 7/7/03 4:36 PM Page 95 7 Profit and Revenue Maximization OVERVIEW The purpose of this chapter is to develop a general framework for finding optimal solutions to managerial decision-making problems.

### Multi-variable Calculus and Optimization

Multi-variable Calculus and Optimization Dudley Cooke Trinity College Dublin Dudley Cooke (Trinity College Dublin) Multi-variable Calculus and Optimization 1 / 51 EC2040 Topic 3 - Multi-variable Calculus

### The Cost of Production

The Cost of Production 1. Opportunity Costs 2. Economic Costs versus Accounting Costs 3. All Sorts of Different Kinds of Costs 4. Cost in the Short Run 5. Cost in the Long Run 6. Cost Minimization 7. The

### The Cobb-Douglas Production Function

171 10 The Cobb-Douglas Production Function This chapter describes in detail the most famous of all production functions used to represent production processes both in and out of agriculture. First used

### An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.

1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.

### Math 115 HW #8 Solutions

Math 115 HW #8 Solutions 1 The function with the given graph is a solution of one of the following differential equations Decide which is the correct equation and justify your answer a) y = 1 + xy b) y

### Theoretical Tools of Public Economics. Part-2

Theoretical Tools of Public Economics Part-2 Previous Lecture Definitions and Properties Utility functions Marginal utility: positive (negative) if x is a good ( bad ) Diminishing marginal utility Indifferences

### Constrained Optimisation

CHAPTER 9 Constrained Optimisation Rational economic agents are assumed to make choices that maximise their utility or profit But their choices are usually constrained for example the consumer s choice

### REVIEW OF MICROECONOMICS

ECO 352 Spring 2010 Precepts Weeks 1, 2 Feb. 1, 8 REVIEW OF MICROECONOMICS Concepts to be reviewed Budget constraint: graphical and algebraic representation Preferences, indifference curves. Utility function

### Noah Williams Economics 312. University of Wisconsin Spring 2013. Midterm Examination Solutions

Noah Williams Economics 31 Department of Economics Macroeconomics University of Wisconsin Spring 013 Midterm Examination Solutions Instructions: This is a 75 minute examination worth 100 total points.

Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:

### Profit Maximization. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University

Profit Maximization PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 The Nature and Behavior of Firms A firm An association of individuals Firms Who have organized themselves

### I d ( r; MPK f, τ) Y < C d +I d +G

1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

### To give it a definition, an implicit function of x and y is simply any relationship that takes the form:

2 Implicit function theorems and applications 21 Implicit functions The implicit function theorem is one of the most useful single tools you ll meet this year After a while, it will be second nature to

### Demand. Lecture 3. August 2015. Reading: Perlo Chapter 4 1 / 58

Demand Lecture 3 Reading: Perlo Chapter 4 August 2015 1 / 58 Introduction We saw the demand curve in chapter 2. We learned about consumer decision making in chapter 3. Now we bridge the gap between the

### Lecture 2: Consumer Theory

Lecture 2: Consumer Theory Preferences and Utility Utility Maximization (the primal problem) Expenditure Minimization (the dual) First we explore how consumers preferences give rise to a utility fct which

### Slutsky Equation. M. Utku Ünver Micro Theory. Boston College. M. Utku Ünver Micro Theory (BC) Slutsky Equation 1 / 15

Slutsky Equation M. Utku Ünver Micro Theory Boston College M. Utku Ünver Micro Theory (BC) Slutsky Equation 1 / 15 Effects of a Price Change: What happens when the price of a commodity decreases? 1 The

### MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.

MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.2011 TİIE 12:30 STUDENT NAME AND NUMBER MULTIPLE CHOICE. Choose the one

### John Kennan University of Wisconsin-Madison October, 1998

The Hicks-Marshall Rules of Derived Demand: An Expository Note John Kennan University of Wisconsin-Madison October, 1998 1. "The demand for anything is likely to be more elastic, the more readily substitutes

### Long-Run Average Cost. Econ 410: Micro Theory. Long-Run Average Cost. Long-Run Average Cost. Economies of Scale & Scope Minimizing Cost Mathematically

Slide 1 Slide 3 Econ 410: Micro Theory & Scope Minimizing Cost Mathematically Friday, November 9 th, 2007 Cost But, at some point, average costs for a firm will tend to increase. Why? Factory space and

### Keynesian Macroeconomic Theory

2 Keynesian Macroeconomic Theory 2.1. The Keynesian Consumption Function 2.2. The Complete Keynesian Model 2.3. The Keynesian-Cross Model 2.4. The IS-LM Model 2.5. The Keynesian AD-AS Model 2.6. Conclusion

### NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Midterm II April 30, 2008

NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Section I: Multiple Choice (4 points each) Identify the choice that best completes the statement or answers the question. 1.

### PART A: For each worker, determine that worker's marginal product of labor.

ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART

### Partial Fractions. Combining fractions over a common denominator is a familiar operation from algebra:

Partial Fractions Combining fractions over a common denominator is a familiar operation from algebra: From the standpoint of integration, the left side of Equation 1 would be much easier to work with than

### Finance 30220 Solutions to Problem Set #3. Year Real GDP Real Capital Employment

Finance 00 Solutions to Problem Set # ) Consider the following data from the US economy. Year Real GDP Real Capital Employment Stock 980 5,80 7,446 90,800 990 7,646 8,564 09,5 Assume that production can

### c 2008 Je rey A. Miron We have described the constraints that a consumer faces, i.e., discussed the budget constraint.

Lecture 2b: Utility c 2008 Je rey A. Miron Outline: 1. Introduction 2. Utility: A De nition 3. Monotonic Transformations 4. Cardinal Utility 5. Constructing a Utility Function 6. Examples of Utility Functions

### Market Supply in the Short Run

Equilibrium in Perfectly Competitive Markets (Assume for simplicity that all firms have access to the same technology and input markets, so they all have the same cost curves.) Market Supply in the Short

### Inflation. Chapter 8. 8.1 Money Supply and Demand

Chapter 8 Inflation This chapter examines the causes and consequences of inflation. Sections 8.1 and 8.2 relate inflation to money supply and demand. Although the presentation differs somewhat from that

Business Conditions Analysis Prof. Yamin Ahmad ECON 736 Sample Final Exam Name Id # Instructions: There are two parts to this midterm. Part A consists of multiple choice questions. Please mark the answers

### D) Marginal revenue is the rate at which total revenue changes with respect to changes in output.

Ch. 9 1. Which of the following is not an assumption of a perfectly competitive market? A) Fragmented industry B) Differentiated product C) Perfect information D) Equal access to resources 2. Which of

### Maximizing volume given a surface area constraint

Maximizing volume given a surface area constraint Math 8 Department of Mathematics Dartmouth College Maximizing volume given a surface area constraint p.1/9 Maximizing wih a constraint We wish to solve

### CHAPTER 4 Consumer Choice

CHAPTER 4 Consumer Choice CHAPTER OUTLINE 4.1 Preferences Properties of Consumer Preferences Preference Maps 4.2 Utility Utility Function Ordinal Preference Utility and Indifference Curves Utility and

### BADM 527, Fall 2013. Midterm Exam 2. Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME

BADM 527, Fall 2013 Name: Midterm Exam 2 November 7, 2013 Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME 1. According to classical theory, national income (Real

### 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 15, 2007. Lecture 13. Cost Function

Short-Run Cost Function. Principles of Microeconomics, Fall Chia-Hui Chen October, ecture Cost Functions Outline. Chap : Short-Run Cost Function. Chap : ong-run Cost Function Cost Function et w be the

### QUIZ 3 14.02 Principles of Macroeconomics May 19, 2005. I. True/False (30 points)

QUIZ 3 14.02 Principles of Macroeconomics May 19, 2005 I. True/False (30 points) 1. A decrease in government spending and a real depreciation is the right policy mix to improve the trade balance without

### Microeconomics Sept. 16, 2010 NOTES ON CALCULUS AND UTILITY FUNCTIONS

DUSP 11.203 Frank Levy Microeconomics Sept. 16, 2010 NOTES ON CALCULUS AND UTILITY FUNCTIONS These notes have three purposes: 1) To explain why some simple calculus formulae are useful in understanding

### Review of Fundamental Mathematics

Review of Fundamental Mathematics As explained in the Preface and in Chapter 1 of your textbook, managerial economics applies microeconomic theory to business decision making. The decision-making tools

### Problems: Table 1: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2

Problems: Table 1: Labor Hours needed to make one Amount produced in 90 hours: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2 1. Refer to Table 1. For Carolyn, the opportunity cost of 1

### Monopoly and Monopsony Labor Market Behavior

Monopoly and Monopsony abor Market Behavior 1 Introduction For the purposes of this handout, let s assume that firms operate in just two markets: the market for their product where they are a seller) and

### Q = ak L + bk L. 2. The properties of a short-run cubic production function ( Q = AL + BL )

Learning Objectives After reading Chapter 10 and working the problems for Chapter 10 in the textbook and in this Student Workbook, you should be able to: Specify and estimate a short-run production function

### Increasing for all. Convex for all. ( ) Increasing for all (remember that the log function is only defined for ). ( ) Concave for all.

1. Differentiation The first derivative of a function measures by how much changes in reaction to an infinitesimal shift in its argument. The largest the derivative (in absolute value), the faster is evolving.

### Preparation course MSc Business&Econonomics: Economic Growth

Preparation course MSc Business&Econonomics: Economic Growth Tom-Reiel Heggedal Economics Department 2014 TRH (Institute) Solow model 2014 1 / 27 Theory and models Objective of this lecture: learn Solow

### Economics 326: Duality and the Slutsky Decomposition. Ethan Kaplan

Economics 326: Duality and the Slutsky Decomposition Ethan Kaplan September 19, 2011 Outline 1. Convexity and Declining MRS 2. Duality and Hicksian Demand 3. Slutsky Decomposition 4. Net and Gross Substitutes

### In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks.

Chapter 11: Applying IS-LM Model In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. We also learn how the IS-LM model

### Economics 121b: Intermediate Microeconomics Problem Set 2 1/20/10

Dirk Bergemann Department of Economics Yale University s by Olga Timoshenko Economics 121b: Intermediate Microeconomics Problem Set 2 1/20/10 This problem set is due on Wednesday, 1/27/10. Preliminary

### ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of July 14 Chapter 11 WRITE: [2] Complete the following labour demand table for a firm that is hiring labour competitively and selling its

### Production Function in the Long-Run. Business Economics Theory of the Firm II Production and Cost in the Long Run. Description of Technology

Business Economics Theory of the Firm II Production and Cost in the ong Run Two or more variable input factors Thomas & Maurice, Chapter 9 Herbert Stocker herbert.stocker@uibk.ac.at Institute of International

### Common sense, and the model that we have used, suggest that an increase in p means a decrease in demand, but this is not the only possibility.

Lecture 6: Income and Substitution E ects c 2009 Je rey A. Miron Outline 1. Introduction 2. The Substitution E ect 3. The Income E ect 4. The Sign of the Substitution E ect 5. The Total Change in Demand

### The fundamental question in economics is 2. Consumer Preferences

A Theory of Consumer Behavior Preliminaries 1. Introduction The fundamental question in economics is 2. Consumer Preferences Given limited resources, how are goods and service allocated? 1 3. Indifference

### The Real Business Cycle Model

The Real Business Cycle Model Ester Faia Goethe University Frankfurt Nov 2015 Ester Faia (Goethe University Frankfurt) RBC Nov 2015 1 / 27 Introduction The RBC model explains the co-movements in the uctuations

### Connecting the Firm s Optimal Output and Input Decisions

Perspectives on Economic Education Research Connecting the Firm s Optimal Output and Input Decisions Stephen Shmanske * Abstract: The paper presents a figure and some simple numerical/algebraic examples

### Microeconomics Topic 3: Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity.

Microeconomics Topic 3: Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity. Reference: Gregory Mankiw s rinciples of Microeconomics,

### Lecture 3: The Theory of the Banking Firm and Banking Competition

Lecture 3: The Theory of the Banking Firm and Banking Competition This lecture focuses on the industrial organisation approach to the economics of banking, which considers how banks as firms react optimally

### The Golden Rule. Where investment I is equal to the savings rate s times total production Y: So consumption per worker C/L is equal to:

The Golden Rule Choosing a National Savings Rate What can we say about economic policy and long-run growth? To keep matters simple, let us assume that the government can by proper fiscal and monetary policies

### Where are we? To do today: finish the derivation of the demand curve using indifference curves. Go on then to chapter Production and Cost

Where are we? To do today: finish the derivation of the demand curve using indifference curves Go on then to chapter Production and Cost Utility and indifference curves The point is to find where on the

### Walrasian Demand. u(x) where B(p, w) = {x R n + : p x w}.

Walrasian Demand Econ 2100 Fall 2015 Lecture 5, September 16 Outline 1 Walrasian Demand 2 Properties of Walrasian Demand 3 An Optimization Recipe 4 First and Second Order Conditions Definition Walrasian

### Demand, Supply and Elasticity

Demand, Supply and Elasticity CHAPTER 2 OUTLINE 2.1 Demand and Supply Definitions, Determinants and Disturbances 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities of Supply and

### Chapter 7: The Costs of Production QUESTIONS FOR REVIEW

HW #7: Solutions QUESTIONS FOR REVIEW 8. Assume the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing?

### Economics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3

Economics 201 Fall 2010 Introduction to Economic Analysis Jeffrey Parker Problem Set #6 Due: Wednesday, November 3 1. Cournot Duopoly. Bartels and Jaymes are two individuals who one day discover a stream

### Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation. Jon Bakija

Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation Jon Bakija This example shows how to use a budget constraint and indifference curve diagram

### Elasticity. I. What is Elasticity?

Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in

### All these models were characterized by constant returns to scale technologies and perfectly competitive markets.

Economies of scale and international trade In the models discussed so far, differences in prices across countries (the source of gains from trade) were attributed to differences in resources/technology.

### Theory of the Firm. The Firm s Problem: Costs and Profits

Theory of the Firm The Firm s Problem: Costs and Profits Firm s Problem: Description We consider a firm producing a single good Q using two inputs: L (labour) and K (capital). The technology of the firm

### Utility Maximization

Utility Maimization Given the consumer's income, M, and prices, p and p y, the consumer's problem is to choose the a ordable bundle that maimizes her utility. The feasible set (budget set): total ependiture

### A Detailed Price Discrimination Example

A Detailed Price Discrimination Example Suppose that there are two different types of customers for a monopolist s product. Customers of type 1 have demand curves as follows. These demand curves include

### The Specific-Factors Model: HO Model in the Short Run

The Specific-Factors Model: HO Model in the Short Run Rahul Giri Contact Address: Centro de Investigacion Economica, Instituto Tecnologico Autonomo de Mexico (ITAM). E-mail: rahul.giri@itam.mx In this

### Microeconomics Instructor Miller Practice Problems Labor Market

Microeconomics Instructor Miller Practice Problems Labor Market 1. What is a factor market? A) It is a market where financial instruments are traded. B) It is a market where stocks and bonds are traded.

### Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position

Chapter 27: Taxation 27.1: Introduction We consider the effect of taxation on some good on the market for that good. We ask the questions: who pays the tax? what effect does it have on the equilibrium

### Consumer Theory. The consumer s problem

Consumer Theory The consumer s problem 1 The Marginal Rate of Substitution (MRS) We define the MRS(x,y) as the absolute value of the slope of the line tangent to the indifference curve at point point (x,y).

ECO364 - International Trade Chapter 2 - Ricardo Christian Dippel University of Toronto Summer 2009 Christian Dippel (University of Toronto) ECO364 - International Trade Summer 2009 1 / 73 : The Ricardian

### ECON 3312 Macroeconomics Exam 3 Fall 2014. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

ECON 3312 Macroeconomics Exam 3 Fall 2014 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Everything else held constant, an increase in net

### Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics

roblem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics 1) Explain the differences between demand-pull inflation and cost-push inflation. Demand-pull inflation results

### CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of \$0 per unit and sets a price to maximize

### CHAPTER 3 CONSUMER BEHAVIOR

CHAPTER 3 CONSUMER BEHAVIOR EXERCISES 2. Draw the indifference curves for the following individuals preferences for two goods: hamburgers and beer. a. Al likes beer but hates hamburgers. He always prefers

### Chapter 6 Competitive Markets

Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

### Chapter 12: Aggregate Supply and Phillips Curve

Chapter 12: Aggregate Supply and Phillips Curve In this chapter we explain the position and slope of the short run aggregate supply (SRAS) curve. SRAS curve can also be relabeled as Phillips curve. A basic

### Employment and Pricing of Inputs

Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level