Problem 1 (2 points) Explain the equivalency between the marginal rate of technical substitution, the slope of a firm's isoquant, and the ratio of two inputs' marginal productivities.
Problem 2 (2 points) A popcorn firm employs 40 labor-hours and 25 capital-hours to produce 800 packets of microwaveable popcorn every day. At this point, the marginal rate of technical substitution is 1 capital-hour per 8 labor-hours. Assuming the producer is currently cost-minimizing, what might the wage and rental rate be?
Problem 3 (4 points) Suppose the market for microwaveable popcorn is perfectly competitive. Demand is given by Q=1000(2-P) and supply by Q=500(P-1). Find the market equilibrium price and quantity, and calculate consumer and producer surplus at market equilibrium.
Sample Solution