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# Econ 201: Assignment #2 Fall 2022 Josh Boitnott Instructions: • Show your work if you want partial marks. Wrong answers with no work shown will receive a mark of 0. • I encourage you to work...

Econ 201: Assignment #2
Fall 2022
Josh Boitnott
Instructions:
• Show your work if you want partial marks. Wrong answers with no work shown
will receive a mark of 0.
• I encourage you to work with others; however, you must submit your own version
of the assignment. Further to that, I request that you not publicly post solutions
for others to copy.
• The answers need to be submitted through Crowdmark and are due byNov. 25th
at 11:59 pm. You will need to submit/upload your solutions through Crowdmark
with the link initial link to the submission sent via e-mail by Crowdmark.
ect position; we should be
the image of your work, please make sure to have sufficient lighting and clarity of
the images.
1. (15 marks) Read “The Nature of the Firm” by Ronald Coase XXXXXXXXXXdiscussing his
views and inquiries on firms exist. Use this paper to discuss how our simplified version
of the firm (i.e. the firm as “black box” producing goods: q = f(K,L)) ignores o
captures important aspects from the real world. To answer this question and receive
full marks, your response should be approximately two paragraphs (and no more than
three).
Your answer should include an explanation of what Coase means when he discusses
entrepreneurs and why they matter for firms. In your answer, be sure to discuss the
analysis Coase has of there only being 1 giant firm in a market. Finally, your answe
should also discuss why uncertainty may or may not be important.
2. (20 marks) Suppose a firm has two different methods of production using the same
capital (i.e. same machines). Method 1 will produce using a CES production function:
q = h(K,L) = (

K +

L)2
Method 2 will produce using a Co
-Douglas production function:
q = g(K,L) = 4×

K × L
Unless specified otherwise, assume P = \$10, w = \$20, and r = \$5 for the remainder of
(a) (3 marks) What is the optimal level of labour to hire in the short run using
h(K,L) given K̄ = 36?
(b) (3 marks) What is the optimal level of labour to hire in the short run using g(K,L)
given K̄ = 36?
(c) (3 marks) How does the firm’s profits compare in part (a) versus part (b)? Why?
(d) (6 marks) What is the short run cost function using h(K,L)? What about using
g(K,L)? Show the optimal q∗ for both.
(e) (5 marks) In the long run, which method would be better for the firm? Explain
why. Would your answer remain the same if w = r = \$10? Explain. (Hint : what
does the long run cost function look like for each? OR how do the Isoquant-
Isocost relationships differ?)
3. (20 marks) In the competitive market for widgets there are 125 identical consumers.
Each individual consumer has the following demand function for widgets:
qD(P ) = 5− P
5
where qD is the quantity an individual consumes and P is the widget’s price. This
problem will look at a cost function that will depend on when production takes place.
Suppose each individual firm has the following cost function:
C(q) = F + q +
q2
4
where C(q) is the cost to the firm of producing q units of the good. Use the information
(a) (1 mark) What is the market demand curve here?
(b) (3 marks) Suppose there are 25 firms in the market, what is the market supply
curve? Why does the value of F not matter to determine the market supply
curve?
(c) (4 marks) Using you answer from parts (a) and (b), what is the equili
ium
quantity Q∗ and market clearing price P ∗ for this market? What is consume
surplus and producer surplus?
(d) (6 marks) Suppose the government implements a tax of τ = \$1.50 per widget sold
on the suppliers of the good. Explain what happens to the quantity sold in the
market as well as the price(s). What is the deadweight loss? How much revenue
does the government earn? What value of F ensures the firms earn 0 profits here?
(e) (6 marks) Ignore the tax from the part (d). Instead of the supply curve found
in part (b), what is the producer surplus when there are 50 firms in the market?
What is the producer surplus when there are 175 firms?
Answered 1 days After Nov 24, 2022

## Solution

Komalavalli answered on Nov 26 2022
Question 1:
Coase argues, Why and under what conditions should we anticipate firms to appear,since production can restart without any organization. As a result, it makes sense for an entrepreneur to recruit staff rather than outsource a certain activity.
Traditional economic theory at the time held that because markets were "efficient," outsourcing was less expensive than insourcing. Coase does, however, point out that there are certain transaction costs connected with using the market; the cost of obtaining an item or service through the market is actually greater than the price of the good. Other costs, such as research and information costs, negotiating costs, trade secret maintenance, and control and enforcement costs, all have the potential to raise the cost of delivering via the market. school. This implies that businesses will prosper if they can generate what they require in-house while avoiding the expenditures.
The firm equation not include transaction cost, therefore it ignores to capture important aspects of real world.
Question 2:
a)q=h(K,L)=( +)2-------------------------------(1)
K = 36
Substituting K = 36 in(1)
q=h(K,L)=( +)2
q=h(K,L)=( 6+)2
q=h(K,L)=36+L+12 expanding q by applying the formula (a+b)2
TC = 20L+5K
TC = 20L+5*36
TC = 20L+180
Max q subject to TC
First order condition
∂q/∂L = 1+12*1/2(L)-1/2=0
-1 = 6/L
L = 6 ignoring negative sign
Optimal level of labour to hire L is 6.
) q=g(K,L)=4-------------------------------(1)
K = 36
Substituting K = 36...
SOLUTION.PDF