2014 Final Examination Questions
During the 1980s, lumber prices average between $195 and $250 per thousand square feet. In 1993 the price hit $491. According to some observers, this price was due to a boom in housing construction; according to others, it was because the federal government was reducing the amount of federal forest open to logging. Did both groups feel that it was due to a shift in the demand curve for lumber? Did both feel that it was due to a shift in the supply curve for lumber? If not, which group emphasized the demand side of the market and which emphasized the supply side?
The group that felt the price increase was due to a boom in housing construction was due to the shift in the demand curve. The group that felt the price increase was due to the government reducing the amount of federal forest available for logging is due to a shift in the supply curve.
If a firm wants to maximize profit, it will try to minimize the cost of producing a given output or maximize the output derived from a given level of cost. The firm will choose it production function Q(K,L)=ʄ(K,L). We learned from the isocost curve that if a firm utilizes two inputs such as capital, K and labor, L, it will choose input combination such that 〖MP〗_K/P_k =〖MP〗_L/P_L where 〖MP〗_K is the marginal product of capital and P_k is the unit price of capital and 〖MP〗_L is marginal product of labor and P_L is the unit price per labor. In what ways can a firm chose an input combination from several inputs as, a,b,c,d,……,n?
Its cost of using levels of these inputs is given by C = w1a + w2b + w3c + …………….. + w14n . Where w1, w2,……….w14 are the prices of inputs a through n.
Suppose the firm’s production function is given by Q = f(a, b, ……………….., n) and that the firm intends to produce an output level of q.
A production of this level of output at least cost entails the following minimization problem:
Min: C = w1a + w2b + w3c + …………….. + w14n
S.t. q ≤ f(a, b, ……………….., n)