1

Prof. D.W. Katzner

Economics 203
Problem Set VI

Acres of Land

The following table describes a production function for potatoes. The numbers in the
center indicate quantities of potatoes (in tons) obtained from various amounts of land and
labor. Assume no other inputs are used in the production of potatoes. (For the purposes of
this problem, land may be thought of as playing a role similar to that of capital in the
model of the firm presented in class.)
7
6
5
4
3
2
1
0

0
0
0
0
0
0
0
0
0

9
10
11
12
12
10
6
0
1

24
24
22
20
16
12
7
0
2

32
36
30
32
26
28
22
24
18
19
13
14
8
8
0
0
3
4
Units of Labor Employed

39
35
30
25
20
15
7
0
5

41
36
31
26
21
16
6.5
0
6

42
37
32
27
22
16.5
6
0
7

1. Does the above production function exhibit diminishing returns to the fixed factor
a. land?
b. labor?
Does it exhibit
a. increasing returns to scale?
b. constant returns to scale?
c. decreasing returns to scale?
2. In a diagram, plot the three points of the isoquant associated with 22 tons of output and
connect the end points to the middle point with straight lines. In the same way (and the
same diagram) plot the 32 ton isoquant. Do these isoquants illustrate diminishing
marginal rates of technical substitution?
As land increases, are total and average products rising, constant or falling as the
22 ton isoquant is crossed when 2 units of labor are employed? When 7 units of labor are
employed?
3. What combination of inputs (land and labor) would give the potato grower the
maximum output of potatoes? Is this necessarily the same output that would maximize
profit? Why or why not?
4. Assume that land rents for $20 per acre and that wage labor us $10 per unit. Suppose
the potato grower produces 22 tons of potatoes. Using the equality-of-marginal-productsper-dollar criterion, determine the combination of inputs that the grower should employ

2
so as to minimize cost. Describe how you would calculate the total cost for each output
(i.e. the points on the total cost curve) given these input prices.
5. Now let rent be $20 and wages be $50, and let potatoes sell for $10 per ton. Calculate
the profit for each combination of land and labor shown in the above table. Arrange these
numbers in a similar table by substituting profit for tons of potatoes. What is the profitmaximizing combination of inputs and what is the associated profit-maximizing output?
How does your answer to this question differ from that to the first question of part 3?
6. Suppose, in part 5, that the grower must use exactly 5 acres of land. For each output,
calculate total cost (i.e. least total cost), average cost, marginal cost, total revenue,
marginal revenue, and profit. How does your calculation of total cost here differ from that
which you described in part 4? Plot (a) average cost, marginal cost, and marginal revenue
in one diagram, and (b) total cost, total revenue, and profit in another diagram. (When
plotting the marginal cost curve, place the marginal cost obtained by moving between
two outputs above the midpoint between the two outputs for which that marginal cost is
calculated.) From the curves in these diagrams deduce the profit-maximizing output.
What inputs are used to produce this output? Is this the least-cost combination of inputs
of part 4 or the profit-maximizing combination of inputs of part 5? Why do your answers
not contradict those of part 5?
7. Assume potatoes are sold in a perfectly competitive market. With input prices given as
in part 5 and with land use restricted to exactly 5 acres as in part 6, fill in the following
table by determining 7 points on the potato growers short-run output supply schedule. (A
supply schedule is similar to the demand schedule recall part 3 of Problem II except
that quantities supplied are substituted for quantities demanded).
Price of potatoes
per ton
$4.54

Tons of potatoes
supplied

$50.00

Plot these points in a diagram and connect them with straight lines. This is the
potato growers supply curve for potatoes.
Recall that to draw the individual consumers demand curve for a good, it was
necessary to fix the prices of other goods and the consumers income. What items, if any,
are held fixed here (i.e., changes in what items will cause the growers supply curve for
potatoes to shift?).
8. Under the assumptions of part 7, would the potato grower be at long-run equilibrium if
potatoes sold in the market for $10 per ton (the same output price as in part 6)? Why or

3
why not? Describe events occurring in the market which would bring the potato
growerif out of long-run equilibriumback into long-run equilibrium.
9. Suppose labor also is purchased in a perfectly competitive market. Taking the rent of
land to be $20 per acre and the price of potatoes to be $10 per ton, and restricting land
use to 5 acres, complete the table below by computing 7 points on the demand schedule
for labor of the potato grower.
Wage per unit of
labor
$110

Units of labor
demanded

$10

Plot these points in a diagram and connect them with straight lines. Is this what is
usually referred to as the demand curve for labor of the potato grower? Why or why not?
What fixed items which, if they change, will cause the curve you have drawn to shift?
SAVE YOUR ANSWERS FOR PROBLEM SET XIII