Question 1: Suppose that f(E,K)=5*E0.4K0.6, K is fixed at K=32, w=16, p=27, r=150.

a. Solve for E*

b. How much output is produced at E*?

c. What are firm profits at E*?d. What is the firm demand elasticity at E*? (note: (?E/?w) is the slope of the labor demand function, which we can find this by taking the derivative of the labor demand function we found inpart (a))

Question 2: a. Suppose q= 4*E3/4K1/4 . What is the MRTS?

b. If w=30, and r=100, what is the cost minimizing amount of labor and capital if the firm producesq=7116? (note: the answers will not be whole numbers, so keep a few decimal places when makingcalculations)

c. What is total cost?

d. Suppose instead that the first uses one more unit of K and still produces q=7116. How much labor willthe firm chose?

Question 4: Ding How uses tofu and vegetables as its only two inputs. These are both normal inputs with
initial prices Ptofu 3= and Pvegetables = 4. Suppose that the prices change to become Ptofu =2 and Pvegetables= 2.

a. In which direction will the substitution effect change Ding How's amount of tofu and vegetables used?

b. In which direction will the scale effect change the Ding How's amount of tofu and vegetables used?

c. Can we say conclusively whether Ding How will use more or less tofu? More or less vegetables