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Exercise Excel

The document discusses production functions, costs, and profit maximization for a firm. It includes: 1) Estimating a Cobb-Douglas production function and calculating output elasticities for capital and labor. 2) Calculating the profit-maximizing level of labor given fixed capital and output/input prices. 3) Determining the cost-minimizing input mix by setting the marginal rate of technical substitution equal to the input price ratio. 4) Estimating a cubic cost function and using it to calculate average and marginal costs at different output levels.

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69 views7 pages

Exercise Excel

The document discusses production functions, costs, and profit maximization for a firm. It includes: 1) Estimating a Cobb-Douglas production function and calculating output elasticities for capital and labor. 2) Calculating the profit-maximizing level of labor given fixed capital and output/input prices. 3) Determining the cost-minimizing input mix by setting the marginal rate of technical substitution equal to the input price ratio. 4) Estimating a cubic cost function and using it to calculate average and marginal costs at different output levels.

Uploaded by

helennguyen242004
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Professor Dr.

Poomthan Rangkakulnuwat

Exercise Excel
.

24. a) *** Determining whether each is statistically significant is ignored, which will
be in statistics or econometrics courses. ****
From Q = CKaLb
ln Q = ln C + a lnK + b lnL
Professor Dr. Poomthan Rangkakulnuwat
Professor Dr. Poomthan Rangkakulnuwat

Ln(Q)= 3.13 + 0.46ln(K) + 0.47ln(L)


ln(C) = 3.13 ⸫ C = exp(3.13) = 22.87
a = 0.46 ➔ If capital increases by 1%, then output increases by 0.46%.
b = 0.47 ➔ If labor increases by 1%, then output increases by 0.47%.
Hence, we can rewrite the equation as
Q = 22.84∙K0.46L0.47
b) K = 400, Poutput = $100, w = $95
To achieve maximized profits, the firm should hire labor until w = VMPL.
When K = 400 ➔ Q = 22.84∙(400) 0.46L0.47
= 359.45 L0.47
𝑑𝑄
MPL = 𝑑𝐿

= 359.45 0.47 ∙L–0.53

= 168.94 ∙L–0.53

⸫VMPL = P∙MPL
168.94
= $100∙ 𝐿0.53

To maximize profit: w = VMPL


168.94
$95 = $100∙ 𝐿0.53

$100 ×168.94
L0.53 = = 177.83
$95

L = 177.831/0.53 = 17,591.37
Professor Dr. Poomthan Rangkakulnuwat

Another way profit (π ) = TR – TC

= PQ – wL – rK

= $100(22.84∙K0.46L0.47) – $95L – rK
𝑑𝜋
= 2,284𝐾 0.46 (0.47)𝐿−0.53 − $95
𝑑𝐿
𝑑𝜋
At K = 400, = 2,284(400)0.46 (0.47)𝐿−0.53 − $95
𝑑𝐿

𝑑𝜋
= 16894. 35 𝐿−0.53 − $95
𝑑𝐿
Find L to max profit: 16894. 35 𝐿−0.53 − $95 =0
L–0.53 = 95/16894.35
L–0.53 = 0.0056
L = (0.0056)–1/0.53 = 17,592

𝑤
c. Cost Minimized is when MRTS = 𝑟

𝑀𝑃𝐿 𝑤
=
𝑀𝑃𝐾 𝑟
w = $75 r = $125

From Q = 22.84∙K0.46L0.47
MPL = 10.73∙ K0.46∙L–0.53

MPK = 10.51∙ K–0.54∙L0.47


𝑀𝑃𝐿 𝑤
From =
𝑀𝑃𝐾 𝑟

10.73 ∙ 𝐾 0.46 𝐿−0.53 $75


−0.54 +0.47
=
10.51 ∙ 𝐾 𝐿 $125
𝐾
1.02 = 0.6
𝐿
𝐾
= 0.588
𝐿
K = 0.588L
Hence the input mix to achieve cost minimization is K = 0.588∙L

Given Q = 4000 ➔ 4000 = 22.84∙K0.46L0.47 This is isoquant equation.


Plug K = 0.588∙L into the isoquant equation:
4000 = 22.84∙(0.588L)0.46L0.47
Professor Dr. Poomthan Rangkakulnuwat

4000 = 22.84∙(0.5880.46) L0.46L0.47


4000 = 22.84∙(0.5880.46) L0.93
4000 = 17.89∙ L0.93
L0.93 = 4000/ 17.89 = 223.59
L = 223.591/0.93 = 335.96 ≈ 336 units
⸫ K = 0.588 L = 0.588 *336 = 197.6 ≈ 198 units

Given Q = 4000 ➔ 4000 = 22.84∙K0.46L0.47 This is isoquant equation.


Use differential: 0 = 22.84 [K0.46 (0.47)L–0.53 dL+ L0.47 (0.46)K–0.54dK]
0 = K0.46 (0.47)L–0.53 dL+ L0.47 (0.46)K–0.54dK
–L0.47 (0.46)K–0.54dK = K0.46 (0.47)L–0.53 dL
𝑑𝐾 0.47𝐾0.46𝐿−0.53
=− ➔ MRTS = | dK/dL|
𝑑𝐿 0.46𝐾−0.54𝐿0.47

Min Cost➔ MRTS = w/r


Professor Dr. Poomthan Rangkakulnuwat

a) Cubic Cost Function: TC = a + bQ + cQ2 + dQ3


Professor Dr. Poomthan Rangkakulnuwat

TC = 47,272 + 555.12Q +4.64Q2 +0.0008Q3


(Statistically significant is ignored)
b) Fixed Cost = 47,272
𝑇𝐶 47272+555.12𝑄+4.64𝑄 2 +0.0008𝑄 3
c) Average Total Cost (ATC) = =
𝑄 𝑄
47272
= + 555.12 + 4.64𝑄 + 0.0008𝑄2
𝑄

47272
When Q = 140, ATC = + 555.12 + 4.64(140) + 0.0008(140)2 = 1558.06
140
𝑑 𝑇𝐶
d) Marginal Cost (MC) = = 555.12 + 9.28Q + 0.0024Q2
𝑑𝑄

When Q = 140 MC = 555.12 + 9.28(140) + 0.0024(140)2 = 1901.36

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