7.34. 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 w, and r₁, the firm chooses the basket of inputs at point A on the following graph, and it incurs the total cost on the isocost line IC. When the factor prices change to w, and r, the firm's choice of inputs is at basket B, on isocost line IC. Basket A lies on the intersection of the two isocost lines. Are these choices consistent with cost- minimizing behavior? K IC₁ A B IC2 L

7.34. 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 w, and r₁, the firm chooses the basket of inputs at point A on the following graph, and it incurs the total cost on the isocost line IC. When the factor prices change to w, and r, the firm's choice of inputs is at basket B, on isocost line IC. Basket A lies on the intersection of the two isocost lines. Are these choices consistent with cost- minimizing behavior? K IC₁ A B IC2 L

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter11: The Firm: Production And Costs

Section: Chapter Questions

Problem 21P

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