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UNIVERSITY OF CALIFORNIA DAVIS
DEPARTMENT OF ECONOMICS
ECONOMICS 100: INTERMEDIATE MICROECONOMIC THEORY
PROBLEM SET 4
Due in class on Thursday May 26
PLEASE write your own name on your paper and staple your pages together
Please explain your answers with a paragraph or two, including diagrams and/or equations
where necessary or useful.
(2) The diagram below (next page) shows budget lines and an isoquant for a beer manufacturer.
It can hire labor L at a cost of w = 24 per unit, and hire capital K at a cost of r = 8 per unit. The
production function is:
q = (1.52)L0.6K0.4
L, Units of labor per hour
(a) Given the above information, what must be true, mathematically, in order for the cost
of producing q = 100 to be minimized?
(b) Does this mathematical condition hold at point x? Point y? Point z?
(c) If this mathematical condition doesn?t hold at some of these points, what is the firm
motivated to do at those points? Be specific.
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