MICROECONOMICS

Question 2 M Dillh 3 2.1) Consider the production function given as y = f(x1,x2) = x: x , where x1 and x2 refer to factor inputs 1 and 2, respectively. 2.1.1) With the aid of a scalar t (t :> 1), prove whether this function exhibits increasing, decreasing or constant returns to scale. (3 marks) 2.1.2) With reference to the production function provided above, is it possible to have decreasing marginal product in inputs and yet increasing returns to scale from a production process? Explain your answer. (4 marks) 3.3) Assume good x1 is a normal good and that the per-unit price p1 of good x1 falls. Explain, with the aid of a diagram, the Slutsky income and substitution effects of the price change. {It} marks)