Scribd
Upload
86 views3 pages

Graduate Introductory Macroeconomics: Mini Quiz 2: Increasing Returns To Scale

1) The document is a mini quiz for a graduate introductory macroeconomics course. It contains 6 questions regarding a firm's optimization problem in a market with increasing returns to scale. 2) The firm chooses price, output, and labor to maximize profits given demand and costs. The first few questions derive the Lagrangian and first order conditions of the optimization problem. 3) Subsequent questions derive expressions for the firm's price, labor usage, profits, and the cutoff productivity level below which a firm will not operate.

Uploaded by

keyyongpark
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
86 views3 pages

Graduate Introductory Macroeconomics: Mini Quiz 2: Increasing Returns To Scale

1) The document is a mini quiz for a graduate introductory macroeconomics course. It contains 6 questions regarding a firm's optimization problem in a market with increasing returns to scale. 2) The firm chooses price, output, and labor to maximize profits given demand and costs. The first few questions derive the Lagrangian and first order conditions of the optimization problem. 3) Subsequent questions derive expressions for the firm's price, labor usage, profits, and the cutoff productivity level below which a firm will not operate.

Uploaded by

keyyongpark
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Mini Quiz 2

ISHISE, Hirokazu

Graduate Introductory Macroeconomics: Mini Quiz 2


Name:

Student ID:

Increasing returns to scale


Suppose that for an operation, a firm needs to employ f > 0 units of labor adding to labor
proportional to output. The firm faces a downward sloping demand curve. A firm chooses
p(j), y(j) and l(j), for taking z(j), w, p, y and f as given.
max

p(j)y(j) wl(j) wf

{p(j),y(j),l(j)}

s.t.

y(j) = z(j)l(j)
(
)
p
y(j) =
y.
p(j)

Note that the productivity z(j) diers across firms.


Question 1 (2 points)
Set-up a Lagrangian of the firms optimization problem.

((
L = p(j)y(j) wl(j) wf + (j)

p
p(j)

)
y y(j) + (j) (z(j)l(j) y(j)) .

(1)

Question 1 (3 points)
Derive first order conditions of the firms optimization problem.

FOCs are
0 = y(j) (j)p p(j)1 y,
0 = p(j) (j) (j),
0 = w + (j)z(j).

Graduate Introductory Macroeconomics

(2)
(3)
(4)

Summer 2014

Mini Quiz 2

ISHISE, Hirokazu

Question 3 (2 point)
Derive the expression of p(j) (as a function of exogenous variables and parameters).

p(j) =

w
.
1 z(j)

(5)

Question 4 (2 points)
Derive the expression of l(j).

l(j) = ( 1) p yw z(j)1

(6)

Question 5 (1 point)
Derive the expression of the profits of the firm.

z(j)l(j) wl(j) wf
1 z(j)
1
=
wl(j) wf
1
1
=
w ( 1) p yw z(j)1 wf
1
= ( 1)1 p yw+1 z(j)1 wf

p(j)y(j) wl(j) wf =

(7)

Question 6 (2 points, bonus, dicult)


In this model, some firms have high z(j), while others have low productivity. If a firms
productivity is very low, the firm would earn the negative profits. If a firms productivity is
high, the firm earns positive profits. There should be a cut-o productivity, z(j) = z. If a firm
has higher productivity than this cut-o, the firm operates. If a firm has lower productivity
2

Graduate Introductory Macroeconomics

Summer 2014

Mini Quiz 2

ISHISE, Hirokazu

than this cut-o, the firm does not operate. Using the zero-profits condition, determine the
cut-o productivity z.

A firm earns zero-profits if the firms productivity satisfies the zero-profits condition:
0 = ( 1)1 p yw+1 z(j)1 wf.

(8)

The cut-o productivity z is this z(j). Hence,


0 = ( 1)1 p yw+1 z1 wf,

(9)

or

1
z =
1

(
( ) 1
) 1
w
f 1
.
p
y

Graduate Introductory Macroeconomics

(10)

Summer 2014

You might also like