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 5 L 3 250 2 E 5LE 150
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2 1522 22 11
Problem Set 2.
Econ 100B. Winter 2023

Aram Grigoryan

January 26, 2023

Each problem is 5 points. Only one problem will be randomly selected and graded.
Please, make sure to attempt and solve all of them!

Reminder: There will be a total of four problem sets. Two of them, those for which you get
the lowest scores, will not count towards the final grade.

1. Consider a firm operating in the short-run using a technology q = f (L, K) where K

is fixed at 10, w = 5, and r = 2. What is the marginal cost if:
1 1
(a) f (L, K) = L 2 K 2
(b) f (L, K) = min {L, K}
(c) f (L, K) = 2L + K

2. Suppose a firm’s cost function is c(q) = q 2 + 100. Compute the average cost, marginal
cost, and average variable cost functions. Also compute the quantity at which average
cost is minimized and compute the minimum average cost. Finally, compute the firm’s
supply curve (in the short and long run).
p
3. Suppose that a firm has the production function f (L, K) = 5L + 3K 2 LK.

(a) In the long run, what is the optimal way for the firm to produce q = 150 units?
Give the optimal values of L and K and explain how these depend on the wage
rate w and rental rate r.
(b) Calculate the long-run cost function of the firm, explaining how it depends on the
wage rate w and rental rate r.

1
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 Problem Set 2.
Econ 100B. Winter 2023

Aram Grigoryan

February 11, 2023

Each problem is 5 points. Only one problem will be randomly selected and graded.
Please, make sure to attempt and solve all of them!

Reminder: There will be a total of four problem sets. Two of them, those for which you get
the lowest scores, will not count towards the final grade.

1. Consider a firm operating in the short-run using a technology q = f (L, K) where K

is fixed at 10, w = 5, and r = 2. What is the marginal cost if:
1 1
(a) f (L, K) = L 2 K 2

MC 1
1 q2
Solution: q = L 2 (10) 2 , and hence, L = 10 . Therefore, C (q) = rK +
q2 q2
wL (q, K) = 20 + 5 10 = 20 + 2 . Therefore, M C (q) = q.

(b) f (L, K) = min {L, K}

Solution: For q  10, L (q, K) = q, and so for q < 10, C (q) = rK + wL (q, K) =
20 + 5q, and so for q < 10, M C (q) = 5.
For q > 10, there is no way to produce that amount, and so for q > 10, C (q) = 1,
and M C (q) = 1.

(c) f (L, K) = 2L + K

Solution: q = 2L + 10 ) L (q, K) = 2q 5 for q 10. So for q 10,

C (q) = 20 + 5q
2
, and therefore, M C (q) = 52 .

1
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 For q < 10, the firm need not use any labor; accordingly, C (q) = 20, and
M C (q) = 0.

2. Suppose a firm’s cost function is c(q) = q 2 + 100. Compute the average cost, marginal
cost, and average variable cost functions. Also compute the quantity at which average
cost is minimized and compute the minimum average cost. Finally, compute the firm’s
supply curve.

Cost and optimal supply.

c(q)
• AT C(q) = q
=q+ 100
q

• M C(q) = c0 (q) = 2q
V C(q) q2
• AV C(q) = q
= q
=q
• The minimum AC occurs where AT C(q) = M C(q) =) q + 100 q
= 2q =) q =
100
10. The minimum average cost is therefore AT C(10) = 10 + 10 = 20.
• A firm’s supply curve comes from setting marginal cost equal to price and solving
for quantity, as long as the price is above the minimum average cost. In both the
short run and long run, solving M C(q) = p yields q(p) = p2 . In the short run, we
need to consider the minimum average variable cost—which is 0—so the supply
curve is given by q(p) for all prices p. In the long run, we need to consider the
minimum average cost—which is 20—so the supply curve is 0 for all prices less
than $20, and is given by the function q(p) for all prices greater than or equal to
$20.

p
3. Suppose that a firm has the production function f (L, K) = 5L + 3K 2 LK.
(a) In the long run, what is the optimal way for the firm to produce q = 150 units?
Give the optimal values of L and K and explain how these depend on the wage
rate w and rental rate r.
p
The production function is strictly convex, because LK is strictly concave.
Therefore, the firm will optimally use only one of the two inputs. Note that if it
uses only L, it needs L = 30 to produce q = 150, and if it uses only K, it needs
K = 50 to produce q = 150. Hence, to be indi↵erent between using only L or
only K, the firm’s isocost must have slope 53 which implies that wr = 53 . Thus,
8
w 5
>
<(0, 50) if r
> 3
⇤ ⇤ w 5
(L (150), K (150)) = (30, 0) or (0, 50) if =
>
:
r
w
3
5
(30, 0) if r
< 3

2
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 (b) Calculate the long-run cost function of the firm, explaining how it depends on the
wage rate w and rental rate r.

Following the same reasoning as in part (a), if the firm uses only L, it needs
L = 5q to produce any q, and if it uses only K, it needs K = 3q to produce any q.
Therefore, 8
q
>
<(0, 3 ) if wr > 5
3
(L⇤ (q), K ⇤ (q)) = ( 5q , 0) or (0, 3q ) if wr = 5
>
: q
3
( 5 , 0) if wr < 5
3

Hence, the long-run cost function is

8
r w 5
>
<3q if r
> 3
c(q; w, r) = w5 q = 3r q if w
= 5
>
:w
r
w
3
5
5
q if r
< 3

3
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