Question

1. (37 points) Lolita is the intelligent and charming Holstein cow, who has been instructed in the mysteries of microeconomics. It turns out that she now considers herself more as a profit-maximizing firm than as a simple consumer: she uses (eats) cow feed and hay to produce milk. If m represents her production of milk, x her consumption of cow feed, and y her con- sumption of hay, Lolita’s technology can be summarized by the following production function: m = Vx+2y. (a) Describe Lolita's technology by computing the marginal product of cow feed, the marginal product of hay, and the technical rate of substitution. 3 point (b) What kind of returns to scale does Lolita's technology exhibit? Explain. 3 points

Answer 1

a)

b) If inputs (x and y) are increased by , then

the output (m) increases by less than

Therefore, Lolita's technology exhibits decreasing returns to scale.

c) Isoquant represent the different combination of inputs required to produce a particular level of output.  Let m= 4

When x=0, then y=8

When y=0, then x=16

Plot (8,0) and (16,0) in order to get the isoquant as IQ2

The isoquant corresponding to m=4 has been plotted in figure given below

When m=2

When x=0, then y=2

When y=0, then x=4

Plot (0,2) and (4,0) in order to get the isoquant as IQ1

d) Unit price of cow feed = Px

Unit price of hay = Py

Amount of cow feed Lolita consumes = X

Amount of hay Lolita consumes = Y

Total cost = cost of cow feed + total cost of hay =price of cow feed * quantity of cow feed consumed +price of hay * quantity of hay consumed = Px X + Py Y

As per the HOMEWORKLIB RULES provided, first four questions have to be answered. Thank you.