Question 1:

Consider a firm with the production function f ( L,K) = L 1/2 K2. Suppose the firm is in the short run and has a level of capital K = 1. If the cost of labor is w= 2 and the cost or capital is r=2, derive the a) TVC, b) TFC c) TC, d) MC, e) ATC, f) AVC, g) AFC. Draw these curves in a relevant set of well labelled diagrams. Repeat the exercise if the firm was in the short run with a capital level of K= 4

Question 2:

Consider a perfectly competitive market where the market demand cursive is p(q)= 1000-q. Suppose there are 100 firms in the market each with a cost function c(q)=q2+1.

a) Determine the short- run equilibrium

b) Is each firm making a positive profit ?

c) Explain what will happen in the transition into the long run equilibrium

d) Determine the long - run equilibrium