Question
1. Consider a firm with a short-run profit 11 2 2 = py w x w x , where p is the output price, y
1. Consider a firm with a short-run profit 11 2 2 = py w x w x , where p is the output price, y is the quantity of output, w1 is the factor price of input 1 and x1 is the quantity used of input 1, w2 is the factor price of input 2, which is fixed in the short run at 2 x . Derive an iso-profit curve for the firm and graphically illustrate the short-run profit-maximising choice of x1 and y for the firm. Carefully explain your result. What happens to your answer if: (i) the price of factor 1 increases; (ii) the output price increases; and (iii) the price of factor 2 decreases? Provide intuition for your answers
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