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Suppose that a firm has the production function f(z1,z2)=Az^1/2,z^1/3, where A>0 is a parameter. You can assume that the firm's production set is convex. (a)[2]
Suppose that a firm has the production function f(z1,z2)=Az^1/2,z^1/3, where A>0 is
a parameter. You can assume that the firm's production set is convex.
- (a)[2] Show that this production technology satisfies the no-free lunch property.
- (b)[2] Show that this production technology satisfies the free disposal property.
- (c)[2] Show that this production technology has decreasing returns to scale.
- (d)[2] Illustrate this production technology's isoquant through the production level q = A.
- (e)[2] Given input prices w1 > 0 and w2 > 0 and output price p > 0, write down the firm's profit maximisation problem.
- (f)[2] Write down the Lagrangean of the firm's profit maximisation problem and derive its first-order necessary conditions for an interior solution.
- (g)[2] Under what conditions is z2 = 0 optimal for the firm?
- (h)[2] Derive the firm's supply functions z1(w1, w2, p), z2(w1, w2, p) and q(w1, w1, p).
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