Question

# 1. Prunella raises peaches. L is the number of units of labour she uses and T...

1. Prunella raises peaches. L is the number of units of labour she uses and T is the number of units of land she uses, her output (bushels of peaches), denoted as Q, is given by Q = √ LT . (a) Consider the short-run decision, in which she has a fixed amount of land (T = 9). Does this production function exhibit the diminishing marginal return on the labour input? Explain your answer.

(b) If she uses 4 units of labour, then what is the marginal product of labour? What does it mean?

(c) If she can sell peaches at the price of \$5, and she has to pay the wage rate at \$4, then how many units of labour does she employ?

3. Consider Prunella in (1). Let denote w as the wage rate and r as the rental rate.

(a) Derive her total cost function.

(b) Based on (a), what is the marginal cost?

Q = L1/2T1/2

(3)

Cost is minimized when MPL/MPT = w/r

MPL = ∂Q/∂L = (1/2) x (T/L)1/2

MPT = ∂Q/∂T = (1/2) x (L/T)1/2

MPL/MPT = T/L = w/r

T = L x (w/r) = (Lw/r)

Substituting in production function,

Q = L1/2(Lw/r)1/2

Q = L1/2 x L1/2 x (w/r)1/2

Q = L x (w/r)1/2

L = Q x (r/w)1/2

T = [Q x (r/w)1/2] x (w/r) = Q x (w/r)1/2

Substituting in total cost function: TC = wL + rT

TC = [w x Q x (r/w)1/2] + [r x Q x (w/r)1/2]

TC = Q x [(wr)1/2 + (wr)1/2]

TC = Q x 2 x (wr)1/2

TC = 2Q x (wr)1/2

(b)

Marginal cost = dTC/dQ = 2 x (wr)1/2