Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Imagine a firm that has the following production function: y = x1x2 Note that this implies the following marginal products (Note very carefully the sub-

Imagine a firm that has the following production function: y = x1x2 Note that this implies the following marginal products (Note very carefully the sub- scripts. They are not a mistake). M P1 = x2 M P2 = x1 Note that this question can be tricky if you try to do it too quickly. If you are having trouble, try at least showing what is happening graphically and explain the intuition. This will get you some good part marks. a) (5 marks) Suppose the price of input 1 was equal to $5, and the price of input 2 was equal to $10. What would be the optimal inputs for this firm if it wished to produce 450 units of output? Hint use the optimality ratio from having the slope of the isocost equal the slope of the isoquant. Combine this with the production function and you should get your answers. The numbers will be nice whole numbers. b) (5 marks) Suppose the price of input 1 increased to $20. What would be the optimal inputs for this firm if it still wished to produce 450 units of output? You can use the same approach as the last question. c) (5 marks) Explain how the firm responded to this increase in price, and how its total costs changed as a result. 5

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Economics

Authors: Thomas Pugel

16th Edition

0078021774, 9780078021770

More Books

Students also viewed these Economics questions

Question

Recognize various nonverbal cues and their effect on customers.

Answered: 1 week ago

Question

Briefly define Galens constitutional types.

Answered: 1 week ago