A firm has production function y = (x1x2)^1.2 , 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 2 and the price of input 2 is 5.

(a) (4 points) Does the production function exhibit decreasing, constant or increasing returns to scale? Why?

(b) (10 points) Derive the long-run total cost (LRTC), average cost (LAC) and marginal cost (LMC) functions of the firm.

(c) (3 points) Draw the LRTC, LAC and LMC curves (LRTC on one graph, and LAC/LMC on a second graph). .

(d) (10 points) Suppose that the quantity of input 2 is fixed at level 1 in the short run. Derive the short-run total cost (SRTC), average cost (SAC) and marginal cost (SMC) functions of the firm.

(e) (3 points) Draw the SRTC, SAC and SMC curves (SRTC on one graph, and SAC/SMC on a second graph).