Microeconomics 2 Comment Sheet

Name and Student ID:

Questions Mark Comments

Q1 - A /1

Q1 - B /2

Q1 - C /2

Q1 – D /1

Q1 – E /1

Total /7

Q2 – A /1

Q2 – B /2

Q2 – C /3

Q2 – D /2

Total /8
 Microeconomics 2
Question 1: Cost Minimization and Cost Curves

Suppose that Jennifer produces good y by using input x1 and x2. The production function which Jennifer
faces is:
1 1
𝑦 = 𝑥12 + 𝑥22

The cost for every unit of x1 is w1 and the cost for every unit of x2 is w2. There is a fixed cost component
F, which also forms a part of her total cost.

(a) Write down the cost minimization problem. Solve this problem and express x1/x2 as a function of
w2/w1.
mm Wik ,
t Wann t F such that flu Nz )
Y
-
, ,
g
ki g 2h27 ,

dy 's
Eni
-

Tn .

dy -

in

the
=

Tn ,

i. -

dye drei -_
TRS
-

dy 1dm

-091dm = Innit?
-
-
= -
wi
-

Wn
Idris Yan ;
'm

'
rz
-

N
,
Wi
-
=

"s
n'
-

Z Wa

Fitz -
Wi
- -

Jn , Wr

Name: Student ID:

 Microeconomics 2
(b) Now that we've worked out the necessary condition for cost minimisation, use this condition to find
the conditional demand for x1 and x2. Once you obtain this, find how an increase in output y affects
the conditional demand for x1 and x2. Furthermore, find how w1 affects the conditional demand for
x2 and how w2 affects the conditional demand for x1.
2
from above : Fez : I 'w÷w )

:÷ ÷ ¥ ÷ ÷ ÷ :
-

se
-

= ne .

Y÷w!lI÷w )
Wz

I oof
(
'
rn
-

e. rn
-

.
-
.

w'

sub Fez ?
into
y =
2yw ,
did -0
-
↳
nik " dy
+ w ,
re
-
= ( wat
wi )
y
- ,

WZ will lead to an
→
Any increase
y
in

Nik
( It
In )=y
,
increase in the conditional
demand
*
of Ri a vice versa
'
k
a. =
y
'
Feo ) .
uit -
-

C w÷w ) .

y
=
d R2
' '
III.will 'w÷w )
-

wz
g- .

" ki "
n

: . .

÷ ( ww÷
=

conditional
'

an moreau in the
. "

demand of uz .
vice versa

way
=

Wz t WI

*
z
m

Name: Student ID:

 Microeconomics 2
(b) Now that we've worked out the necessary condition for cost minimisation, use this condition to find
the conditional demand for x1 and x2. Once you obtain this, find how an increase in output y affects
the conditional demand for x1 and x2. Furthermore, find how w1 affects the conditional demand for
x2 and how w2 affects the conditional demand for x1.

effect of w, oh Na

of N

:÷ ÷ ÷ : ÷ ÷ f ÷ ÷ :÷
wz on
2
ltteet ,

/I÷w ) wily
WEI
"" '

)
→

WI
(
-
→
n
Twin ,
-

.
.

WZTW '
( Wztw, )Z
(wat will
z z

let u=
way ,
v -_

'

wily
'
let v= g v -
( Wat w .
)
'
'
VU UU
022
-
'

t.dk/=fwz+wi12zwzy2-WeTy22(wztwi )
- .

=
- -

ON v2
-

?YZ1(w2tw )
,
-

122W y
'
( wztw ,
- w '
dwz - I
= ,
Lwztw ) .

-
'

}y
"
( wat wi
) Lwztw )zwzyZ 2W
-
=
.

=
(
www./2w.y2-2wi2y2 -

::÷ :
of
the condition demand of ne
on the conditional demand

NZ

Name: Student ID:

 Microeconomics 2
(c) Now that we have found the conditional demand, substitute them back into the cost function. Find
the Average Cost, Average Variable Cost, Average Fixed Cost and Marginal Cost functions assuming
F=6, w1=2 and w2=4.

TC =
Wi ki t Wz Nz t F
'

( wwifw ) 't
( ww÷a )
=
"
wa tf
.
,

44,1/2+4 (g)
= '
t le

'

8g
'
y
GI
t
6
=
t
y

TL '

Iz
=

y
t b

I
'

AC
GI
= t

y
- .

4g y
Auc =

AFC
=
I →
-
I = o

y ya
MC = 8

3- y

Name: Student ID:

 Microeconomics 2
For parts (d) and (e) assume F=6, w1=2 and w2=4.

(d) i) Sketch the AC, AVC, AFC and MC curves on the grid below which uses the cost output plane.

813g ac-izf-FA.ve
Assume
139
- " -

Mc
- -

AC,AVC,AFC, MC

:X
/

t
'

•
(O

"¥)
6 .

(FF
'

" )
4 us ,
••• .

2.

'
1- AFL
' E
Y

O l 2
3 4 5 y 7 8 9 10 'l

Name: Student ID:

 Microeconomics 2
e) Show that the MC curve intersects the AVC curve and the AC curve at the minimum point.

dy
AVC
sky
'

Egg Ac=zIyt
-

no
-

, g

AC DAC

tf
min :
o

It
-
-
= -

Ty
=
6
I
} Tgz
y
Ef
-
-

AVC : DAVI
'

min O
=
I =

s
og
=
O

/
-

@ y O
-

AVC
-

intersects
fuse
me
Ac @
-

Rtp
intersects
y
-

RTP :
MC

ML
- AVC
equate :

equate : me =
AC

Ey sky
=

f- y Is bye
'

y
-
=

:"
"

÷ :÷÷ :÷÷ : the

AVC at
. I.
MC intersects
intersects at the
point
.

no AC -

minimum
o .

min IM
IM
point

Name: Student ID:

 Microeconomics 2
Question 2: Supply

Suppose that Jessica faces the following total cost function:

𝐶 (𝑦) = 2𝑦 2 + 𝑦 + 200

Note that 200 denotes the fixed cost component. Use this information in answering this part of the
submission question.

(a) Find the Marginal cost function, Average Cost function, Average Variable cost function and the
Average fixed cost function. Once you obtain these, sketch them on the grid below.

AC,AVC,AFC, MC MC Al AVL

if
⇐
'

100

60
.
.

50
.

i:
"

10

I
µ\
a.

5 10 15
a

#o_
20 25 y 35 40 45 50 55
AFC

SO

ME
4yt1
t 201
c=2yt
I
A-

y
TI
2g
'
AVC

AFC =
200

g-
Name: Student ID:
 Microeconomics 2
(b) Derive the short run supply function for Jessica. Suppose p = 61. How much y does Jessica supply
in the short run? What is Jessica’s producer surplus (i.e. total revenue less total variable costs) in the
short run?
its
cyl py Cs ly )
-

Max
-
-

y ro

first order condition is

dits ly )
ly ) o
-

MCs
-

=p
-

g- p
=
mcsly )

y=p
→

4yt
= ,

p
i -

@ p= 61

61 4ytl
-

=
15
y
I

producer surplus -
total revenue
-

total variable costs

=p y only )
-

=
61 .
is
-

( 2h51 't 115 ) )

=
450

Name: Student ID:

 Microeconomics 2
(c) Derive the long run supply function for Jessica. Suppose p = 61. How much output does Jessica supply
in the long run? What is Jessica’s profit (i.e. total revenue less total costs) in the long run?
ily )
Fly ) PY will supply 9=10
-
-
-

)
in the
long run , jessica
Max
Ily ) =p y -

Cly )
470 s .
IT = TR -
TC

first order condition 't +200 )

py 2g y(
= -

o
-
-

p
- me ly )
MUY ) where p 7
CLI 611,01 [211012+10-1200]
-

p =
,
=

if I = 200

Second order condition

c) Muy )
= 4
,
t -

dI > o

g- dy

÷
"
" ""
"

i .
"÷÷÷÷
AC = 41

Long
run
supply curve

0 if pay ,

{
,

g
I
P
-

if p 741
,

Name: Student ID:

 Microeconomics 2

(d) Both in short run and long run, Jessica supplies a strictly positive amount of y (i.e. y > 0). True or
False? Explain why.

if off the shutdown condition for short

p7 Auc based run
yso true

61 AVC = 31
short :
p
-
-

run ,

positive
"
since p
>
,
Avc ,
it is true that jessica supplies a
strictly
amount of
o)
y ly
>

down condition for run

long
-

based OH shut -

true if P2 mint Ac )
y >0
41 AC -
41
@
:
p
-

run a

long
amount of
jessica supplies positive
i
.

p=
Auc
,
true that a
strictly
o)
gig
>

Name: Student ID: