Question: 5 . ( 2 0 points ) Let's assume that the production technology of a firm using labor and capital to produce good x is

5.(20 points) Let's assume that the production technology of a firm using labor and capital to produce good x is homothetic. According to this production technology, there are increasing returns to scale when the level of production is between 0 and xA, constant returns to scale when between xa and xB, and decreasing returns to scale when above xB (0< xA < xB).
(a) Draw isoquants for xA and xB on a graph with labor on the horizontal axis and capital on the vertical axis. For the given input prices w and r, indicate the point A =(lA, kA) at which you can produce xa at the lowest cost using an isoquant. Indicate the slopes of the isoquant and the isoquant at point A.
(b) On the same graph, show where point B should be located where you can produce xB at the lowest cost. What will be the shape of the vertical section passing through all cost minimization points? Show it on a separate graph with inputs (l and k together, you can assume l=k only for this graph) on the horizontal axis and x on the vertical axis.
(c) Redraw the graph you drew in (a). On this graph, mark the possible data of the input baskets for which the firm will maximize its profit for any product price p >0 and explain this situation.
(d) Let (l*, k*, x*) be the production plan for which the firm maximizes its profit. Which two conditions regarding the marginal efficiency of inputs will be satisfied in this production plan (and only in this production plan)? Explain.

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