Question: Problem 1 (From Baye and Prince, Chapter 5) A firm can manufacture a product according to the following (Cobb-Douglas) production function. Q = F(K,L) =

Problem 1 (From Baye and Prince, Chapter 5) A firm can manufacture a product according to the following (Cobb-Douglas) production function. Q = F(K,L) = K0.4L0.6 a. Calculate the average product of labor, APL, when the level of capital is at 15 units and the firm uses 20 units of labor. How does the average product of labor change if the firm's level of capital was at 200? b. MPL = 0.6*( K0.4L-0.4) and MPK = 0.4*( K-0.6L0.6). Your budget is $1200, your wage rate w is $25 and your rental rate of capital r is $75. How much labor and capital do you hire and how much do you produce at that point? Problem 2 (From Baye and Prince Chapter 8) You are the manager of a monopoly, and your demand and cost functions are given by P = 3003Q and C(Q) = 1,500+2q2 With these functions, Marginal Revenue and Marginal Cost are given by MR = 300 6Q and MC = 4Q a. What price-quantity combination maximizes the firms total profits? b. Calculate the maximum profits. c. Is demand elastic, unit-elastic, or inelastic at the profit maximizing point? d. What price-quantity combination maximizes revenues? e. Calculate the maximum revenues. f. Is demand elastic, unit-elastic, or inelastic at the revenue maximizing point?

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