Question
A firm has production function y = (x1x2) 0.3 , where y is the level of output and x1 and x2 are the quantities of
A firm has production function y = (x1x2) 0.3 , where y is the level of output and x1 and x2 are the quantities of input 1 and input 2, respectively. Suppose that the price of input 1 is 4 and the price of input 2 is 12. (a) Does the production function exhibit decreasing, constant or increasing returns to scale? Why? (b) Derive the long-run total cost (LRTC), average cost (LAC) and marginal cost (LMC) functions of the firm. (c) ) Draw the LRTC, LAC and LMC curves (LRTC on one graph, and LAC/LMC on a second graph). . (d) Suppose that the quantity of input 2 is fixed at level 4 in the short run. Derive the short-run total cost (SRTC), average cost (SAC) and marginal cost (SMC) functions of the firm. (e) () Draw the SRTC, SAC and SMC curves (SRTC on one graph, and SAC/SMC on a second graph).
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