Scribd
Upload
4 views3 pages

Econ601 PS1

The document outlines Problem Set 1 for a course, due on October 31st, which includes various tasks related to production sets and profit-maximizing firms. It requires students to analyze properties of production sets, provide examples, and solve problems involving supply correspondence and profit functions. Additionally, there are extra problems that explore alternative definitions of returns to scale and a specific production function for profit maximization.

Uploaded by

steph
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
4 views3 pages

Econ601 PS1

The document outlines Problem Set 1 for a course, due on October 31st, which includes various tasks related to production sets and profit-maximizing firms. It requires students to analyze properties of production sets, provide examples, and solve problems involving supply correspondence and profit functions. Additionally, there are extra problems that explore alternative definitions of returns to scale and a specific production function for profit maximization.

Uploaded by

steph
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Problem Set 1

due on Thursday, October, 31st

1. Review the Properties of Production Sets from class notes (or from MWG on pg. 130). Draw
a production set for which all of the following hold:

• No free lunch is satisfied.

• Irreversibility is not satisfied (i.e., production is reversible) over some regions of the produc-
tion process.

• The production set is not everywhere closed.

• The possibility of inaction is violated.

• The production set exhibits nondecreasing returns to scale.

0 0
2. A production set Y is additive if y, y ∈ Y implies that y + y ∈ Y .
(a) Give a brief description in words of what this condition means economically.
(b) Give two examples of single-input, single-output productions, one of which satisfies addi-
tivity, and one of which does not.
(c) Let Y be a general (multi-input, multi-output) production set that exhibits non-increasing
returns to scale (i.e., for any y ∈ Y , we have αy ∈ Y for all α ∈ [0, 1]). Show that if Y is additive,
then Y is convex and exhibits constant returns to scale.

1
3. The technologically feasible input-output pairs for a profit-maximizing firm is given by

Y = {(0, 0), (−1, 2), (−3, 3), (−4, 6), (−8, 8)}

(a) Find the firm’s supply correspondence y(p).


(b) Find the firm’s profit function π(p).
0 00 00 0
(c) We say that a technology Y is larger than technology Y if Y ⊂ Y . Find the largest
technology in R2 that has the same profit function Y has.

Extra Problems (not graded)

4. Consider a single-output production function f (x), and let Y be the associated production set

Y = {(−x, y) | x ≥ 0 and y ≤ f (x)}.

(a) An alternative definition of non-decreasing returns to scale is f (tx) ≥ tf (x) for all t ≥ 1.
Show that this definition of non-decreasing returns to scale is equivalent to the definition given in
class, i.e., show that f (tx) ≥ tf (x) for all t ≥ 1 if and only if y ∈ Y implies that αy ∈ Y for all
α ≥ 1.
(b) An alternative definition of non-increasing returns to scale is f (tx) ≤ tf (x) for all t ≥ 1.
Show that this definition of non-increasing returns to scale is equivalent to the definition given in
class, i.e., show that f (tx) ≤ tf (x) for all t ≥ 1 if and only if y ∈ Y implies that αy ∈ Y for all
α ∈ [0, 1].

5. Consider the following production function: f (x1 , x2 ) = xα1 x21−α where α ∈ (0, 1).
(a) Formulate the profit maximizing problem when the output price per unit is p and the factor
prices are w1 and w2 and derive the profit-maximizing first order conditions.
(b) Now suppose that the pair x1 and x2 solves the first order conditions. Multiply the first
order condition for factor i by xi for i ∈ {1, 2}. Add the two conditions. What does this tell you
about the profit at the profit maximizing pair (x1 , x2 )?

2
(c) Finally, define the output y = xα1 x21−α . Show using the first order conditions that it is
possible to express the factor demands for x1 and x2 as a function of y, w1 , and w2 (the output
price p should not be a part of these functions). Using these factor demands, write down the
profit maximization problem where the choice variable is not the level of output y. Let α = 1 and
w1 = w2 = 1. For which prices p of the output good is there a solution to the profit maximization
problem?

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy