Question

A firm has the following production function:

?(?_1, ?₂) = ???{?₁, 2?₂}

1. A) Does this firm’s technology exhibit constant, increasing, or decreasing returns to scale?

2. B) What is the optimality condition that determines the firm’s optimal level of inputs?

3. C) Suppose the firm wants to produce exactly ? units and that input 1 costs $?₁ per unit and

   input 2 costs $?₂ per unit. What are the firm’s conditional input demand functions?

4. D) Using the information from part D), write down the firm’s total cost function as afunction of ?₁, ?₂, and ?.

Answer 1

A flm, n) = min (x. 222) This is the case of perfect complements which has neither increasing nor decreasing returns to scale. It has constant returns to scale. 32 optimality condition: n. 2u2 an torna I c n = 2u2 nz- u. i ny d) Cost & win, twenz - w, y t way = y Czw, twz) 2