Econ 2150 Exam Prep Questions with Verified
100% Correct Answers
Long run: - ✔✔A period of time when the quantities of all of the firm's input can vary.
Short run - ✔✔A period of time when at least one of its inputs' quantities is fixed.
Long-run cost minimization - ✔✔Minimize the firm's costs, subject to a firm
producing a given amount of output.
Cost to the firm:
TC = Total Cost
w = wage rate
L = Quantity of Labor
r = price per unit of capital services
K = Quantity of Capital
TC=wL+rK (need to find (K*,L*) to min TC and make 100) (Q(K,L)=^-Q)
(ex. if Q=f(K,L)=100 then MAXTL(profit)=TR-TC =PxQ-TC =^_TR-minT)C
Isocost Line - ✔✔The set of combinations of labor and capital (L and K) that yield the
same total cost for the firm. Producer tries to find the lowest possible Isocost line. K on
y axis and L on x axis and increasing total cost is the graph more right and/or up (think L
with arrow each end). Isocost is a straight downward sloping line.
Isocost Line formula - ✔✔K= TC/(r-(w/r)L) or K=(TC/r) - (w/r)L (TC/r is the vertical
intercept, and w/r is the horizontal intercept)
, Long-Run Cost Minimization: Cost minimization subject to satisfaction of the isoquant
equation: - ✔✔Q0=f(L,K) Note: analogous to expenditure minimization for the
consumer
Long-Run Cost minimization: tangency condition: - ✔✔MRTSL,K = -MPl/MPk = -w/r
(or) MPl/w = MPk/r
Constraint: Q0 = f(K,L) (try to min TC=rk+wl)
Solution to cost minimization 2: - ✔✔-> Slope of isoquant = slope of isocost line
-MRTSl,k=w/r (or) MPl/MPk=w/r
-> Ratio of marginal products = ratio of input prices
MPl/w=MPk/r
Corner Solution - ✔✔The cost-minimizing input combination for producing Q0 units
of output occurs at point A where the firms uses no capital. At this corner point the
isocost line is flatter than the isoquant.
-(MPl/MPk)<-(w/r)
-> MPl/w>MPk/r
(if cobb then solution is def interior because use both inputs)
(If the slope of the isoquant is not equal to slope of the isocost line for any positive
combinations of K and L)
Comparitive statics - ✔✔A change in the relative price of inputs changes the slope of
the isocost line. (lets say cobb douglas isoquant convex to origin and get interior
solution lets say price ratio w/r)
100% Correct Answers
Long run: - ✔✔A period of time when the quantities of all of the firm's input can vary.
Short run - ✔✔A period of time when at least one of its inputs' quantities is fixed.
Long-run cost minimization - ✔✔Minimize the firm's costs, subject to a firm
producing a given amount of output.
Cost to the firm:
TC = Total Cost
w = wage rate
L = Quantity of Labor
r = price per unit of capital services
K = Quantity of Capital
TC=wL+rK (need to find (K*,L*) to min TC and make 100) (Q(K,L)=^-Q)
(ex. if Q=f(K,L)=100 then MAXTL(profit)=TR-TC =PxQ-TC =^_TR-minT)C
Isocost Line - ✔✔The set of combinations of labor and capital (L and K) that yield the
same total cost for the firm. Producer tries to find the lowest possible Isocost line. K on
y axis and L on x axis and increasing total cost is the graph more right and/or up (think L
with arrow each end). Isocost is a straight downward sloping line.
Isocost Line formula - ✔✔K= TC/(r-(w/r)L) or K=(TC/r) - (w/r)L (TC/r is the vertical
intercept, and w/r is the horizontal intercept)
, Long-Run Cost Minimization: Cost minimization subject to satisfaction of the isoquant
equation: - ✔✔Q0=f(L,K) Note: analogous to expenditure minimization for the
consumer
Long-Run Cost minimization: tangency condition: - ✔✔MRTSL,K = -MPl/MPk = -w/r
(or) MPl/w = MPk/r
Constraint: Q0 = f(K,L) (try to min TC=rk+wl)
Solution to cost minimization 2: - ✔✔-> Slope of isoquant = slope of isocost line
-MRTSl,k=w/r (or) MPl/MPk=w/r
-> Ratio of marginal products = ratio of input prices
MPl/w=MPk/r
Corner Solution - ✔✔The cost-minimizing input combination for producing Q0 units
of output occurs at point A where the firms uses no capital. At this corner point the
isocost line is flatter than the isoquant.
-(MPl/MPk)<-(w/r)
-> MPl/w>MPk/r
(if cobb then solution is def interior because use both inputs)
(If the slope of the isoquant is not equal to slope of the isocost line for any positive
combinations of K and L)
Comparitive statics - ✔✔A change in the relative price of inputs changes the slope of
the isocost line. (lets say cobb douglas isoquant convex to origin and get interior
solution lets say price ratio w/r)
