THE GEORGE WASHINGTON UNIVERSITY

Department of Economics
A. Yezer Eleventh Problem Set in Economics 11-10 Fall 2009
This problem set is due on Monday, November 16, 2009. Please answer questions
using 8.5x11 inch sheets stapled together. Neatness is important but handwriting is acceptable.
Put your name, student number, TA name, and discussion section number on the first page.
Work will be collected in class or it must be turned in by 5:00 pm to the box in the Department
of Economics office, Monroe Hall, Room 340. Late work is not acceptable. Out of town? Ill?
Mail (USPS) work to A. Yezer, Department of Economics, George Washington University,
Washington, D.C. 20052. Be sure that it is postmarked on the day that it is due.
Students may CONSULT with classmates but answers must be the author's own work
written in the author's own words! Please retain a copy of the problem set for your records.

1a. Yao Pan uses land, labor, and tractors to grow corn. Currently, the annual rental
price of land is $500/acre, annual wages for farm workers are $8,000, and annual rent per tractor
is $1,000. If the marginal products of land, labor, and tractors are: MPLAND=2,000;
MPLABOR=24,000, and MPTRACTORS=2,000 bushels of corn per year, is Yao Pan MINIMIZING
THE COST of producing given output? Assuming that Yao Pan is a price taker in both factor
and product markets, how might she adjust her input mix?
1b. Now if Yao Pan learns that the price of corn is $4 per bushel and she wishes to
MAXIMIZE PROFIT, what adjustments in input mix might she make and what marginal
products of land, labor, and tractors would you expect to observe after she made the
adjustments?

2. Global warming is expected to reduce crop yields by 10%. This means that poor
farmers in developing countries will produce 10% less crop output. If own price elasticity of
demand for crops is -0.5, what will the 10% fall in output due to the price of crops? What will
happen to the earnings of these poor farmers?

3. Assume that the price of corn is $4 per bushel and that the marginal product of land
used for corn in bushels per acre (per year) is given by MPLC = 100 – 0.5LC, where LC is acres of
land used for corn. Assume that the price of wheat is $6 per bushel and that the marginal
product of land used for wheat in bushels per acre (per year) is given by MPLW = 300 – 3LW
where LW is acres of land used for wheat.
3a. Find the demand for land functions of corn and of wheat farmers.
3b. Assume that there is only 100 acres of land to be divided between wheat and corn
farmers. What will the annual rent per acre be and how much land will be used for corn?
3c. Let the price of corn rise to $8 per bushel and answer the question again. Note what
you have learned from comparing 3b and 3c.

4a. If total expenditure on bread falls when price falls, what does this imply about the
own price elasticity of demand for bread?
4b. If beef is a superior good, what happens when income rises by 10%?
4c. If average cost is falling, what does this imply about marginal cost?
4d. If total cost is rising, what does this imply about average cost?
 5. Clarence the Computer Hacker can either start his own business writing specialized
software or work for Microsoft. If he starts his own business, he will need to invest $100,000 of
his own money and work 2,500 hours per year and receive revenues of $100,000 per year. If he
works for Microsoft, his salary will be $80,000 per year, he will also have to work 2,500 hours
per year. Finally, assume that he is currently earning a 10% return on his investments. Should
Clarence start his own software business? If he starts his own business, what economic profit
will he earn?

6a. Assume that Mike’s Machine Shop is technically efficient. If the wage of machine
operators is $20 per hour, the wage of fork lift operators is $15 per hour, and hiring an
additional machine operator can result in production of 40 additional widgets, how many added
widgets can be produced by hiring another fork lift operator
6b. In 6a, if the price of widgets is $1 each, is Mike maximizing profits?
6c. In 6b, if the price of widgets is $0.50 each, is Mike maximizing profits?

7. On page 240 of Case, Fair, Oster and page 250 of Case and Fair, answer problems 5,
6, 7, and 8.

8. In Hamermesh do problems 9.1, 9.2, 9.5, 9.6 and 9.9