Question: This problem will enable you to apply a revealed preference argument to see if a firm is minimizing the total cost of production. The firm

This problem will enable you to apply a revealed preference argument to see if a firm is minimizing the total cost of production. The firm produces output with a technology characterized by a diminishing marginal rate of technical substitution of labor for capital. It is required to produce a specified amount of output, which does not change in this problem. When faced with input prices w1 and r1, the firm chooses the basket of inputs at point A on the graph below, and it incurs the total cost on the isocost line IC1. When the factor prices change to w2 and r2 the firm's choice of inputs is at basket B, on isocost line IC2. Basket A lies on the intersection of the two isocost lines. Are these choices consistent with cost minimizing behavior?

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