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MODULE 4 Technology
1. You are the manager of 2 small stores with production functions q = K¼L¼ and a larger store with production function q = 2K¼L¼. You hire capital for $4, labour for $1. When you took over this role, your boss told you that Q = 24 was the profit maximizing output for this multi-plan firm: 24 = q1 + q2 + q3. Now, the price of labour rises to $4. Provide (i) Isoquant/Isocost diagrams, (ii) Total Cost and (iii) Marginal Cost diagrams. Illustrate the substitution effect (point a to b) and output effect (point b to c) on these diagrams. Explain why your firm uses less capital even when the price of labour increases. (September 2010) For the production function q = K2 + L2 (A) Demonstrate that the elasticity of substitution is negative. (B) Provide a labelled diagram showing the q = 100 isoquant (C) Briefly explain what a negative value means for σ 3. 4. A special production function is q = min( 80K, 4L1 + 2L2). Discuss the production process described by this function. Is this production function constant returns to scale? Five-year-old Jack has set up a hot chocolate stand outside his home. His customers like hot chocolate made in only one way, one unit of chocolate and 3 units of milk to go into each unit of hot chocolate. Jack’s mother, Naomi, provides him with heat, cups and cleaning free of charge. However, she charges him $0.25 for each unit of chocolate and $0.50 for each unit of milk. What are the returns to scale for his production function? (September 2008) Please answer both of the following questions. Provide clearly written, concise answers (maximum 100 words each). Provide diagrams as appropriate. (a) How are the ideas of diminishing marginal productivity and returns to scale related? Can a firm that has diminishing marginal products for all inputs still exhibit increasing

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...NORC at the University of Chicago The University of Chicago Analyzing the Extent and Influence of Occupational Licensing on the Labor Market Author(s): Morris M. Kleiner and Alan B. Krueger Source: Journal of Labor Economics, Vol. 31, No. 2, The Princeton Data Improvement Initiative (Part 2, April 2013), pp. S173-S202 Published by: The University of Chicago Press on behalf of the Society of Labor Economists and the NORC at the University of Chicago Stable URL: . Accessed: 05/09/2013 08:02 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact . The University of Chicago Press, Society of Labor Economists, NORC at the University of Chicago, The University of Chicago are collaborating with JSTOR to digitize, preserve and extend access to Journal of Labor Economics. This content downloaded from on Thu, 5 Sep 2013 08:02:47 AM All use subject to JSTOR Terms and Conditions Analyzing the Extent and Influence of Occupational Licensing on the Labor...

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