IMPORTANT: I know the answer is "C". Could you help me understand the reasoning/concepts behind why...

Question

Question

IMPORTANT: I know the answer is "C". Could you help me understand the reasoning/concepts behind why the answer is "C"

Profit functions are homogeneous of degree

a. zero in input and output prices

b. zero in input prices.

c. one in input and output prices.

d. one in input prices.

Answer 1

Answer #1

Answer C)

If all input & output prices gets doubled , then profit will also get doubled,

Bcoz when all input/ output prices double, then optimal levels of output & inputs remain unchanged.

But profit rises with inflation .

Answer 2

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