Question 1: PROFIT MAXIMIZATION OF A MULTIPRODUCT FIRM In your microeconomic and/or managerial-economic classes, you have mostly studied the optimal behavior of a rm that produces just one single type of good. In a more realistic setting, a rm can allocate its resources (e.g. labor, capital, and land) to two or more than two products that it has the technological knowledge to produce. An important question that arises under such a situation is as the following: What is the best combination of the two goods that the rm should choose to produce? In other words, what combination of the two goods should be produced by the rm to maximize its prot? Only when the rm knows a clear answer to this question, the rm can allocate its limited resources/inputs accordingly optimally to producing that optimal combination of the two goods. A Production Possibilities Curve (PPC) can help us business leaders nd such optimal production/allocation combinations. Suppose that there is a two-product rm called XYZ, which produces two goods called Good A and Good B, and that the following PPC curve exhibits all the combinations of the two goods A and B that this rm can possibly produce, given its available resources and current level of technology. Good B 400 1400 1800 2000 GoodA Additionally, assume that the current market price of Good A per unit is equal to PA=$50, and that the current market price of Good B per unit is equal to P3=$75. Furthemiore, for the sake of simplication, assume that the marginal cost of producing the two goods is constant (although this assumption does not seem to be valid for the above bow-shaped PPC), and therefore, the average total cost (aka per-unit cost) of producing either good is xed with respect to the scale of the production of either good, meaning that when the scale of the production of either good changes, the per-unit costs stay the same. Moreover, assume that, given the current market prices of inputs, the current per-unit cost of production for Good A is equal to CA=$20, and that for Good B is equal to CB=$25. Please also recall from your previous courses that: Prot = Total Revenue Total Cost Profit = (P * Q) (c * Q) Prot= (P - c) * Q where P denotes the price of the product, Q denotes the quantity produced of the product, and c denotes the per-unit cost of production of the product under study. Here in this context, you have two products, so to compute the total profit generated by the firm, you will compute the profit made out of each good and finally sum them up to obtain the firm's total profit for each production combination. Now, please answer the following questions. a. Consider the five production combinations shown on the curve (the points numbered (1), (2), (3), (4), and (5)). Among these five production combinations, which point is the best production combination for the firm XYZ to operate on? That is, which of these five points brings about the highest total profit for the firm among the five points under study? (5 pts) b. How much is the highest total profit that the point you have identified in Part "a" brings about for the firm? (2 pts) c. Now suppose the market prices of your products change from the prices mentioned about to two new prices being PA=$75 and PB=$45, while the firm's per-unit costs remain unchanged. Consider the five production combinations shown on the curve (the points numbered (1), (2), (3), (4), and (5)). Among these five production combinations, which point is the best production combination for the firm XYZ to operate on after the price changes described above? That is, which of these five points brings about the highest total profit for the firm among the five points under study after the price changes described above? (5 pts) d. How much is the highest total profit that the point you have identified in Part "c" brings about for the firm? (2 pts) e. Does the change, if any, in the best production combination (the decrease/increase in the production of either/both good(s)) from Part "a" to Part "c" make sense to you? Why or why not? (2 pts)