A firm uses two inputs, capital and labor, to produce output. Its production function exhibits a diminishing technical rate of substitution (e.g. Cobb-Douglas production function). 1. If the price of capital and the price of labor increase by the same percentage (e.g., 40 percent), what will happen to the cost-minimizing input quantities for a given output level? 2. If the price of capital increases by 20 percent while the price of labor increases by 40 percent, what will happen to the cost-minimizing input quantities for a given output level?
A firm uses two inputs, capital and labor, to produce output. Its production function exhibits a diminishing technical rate of substitution (e.g. Cobb-Douglas production function). 1. If the price of capital and the price of labor increase by the same percentage (e.g., 40 percent), what will happen to the cost-minimizing input quantities for a given output level? 2. If the price of capital increases by 20 percent while the price of labor increases by 40 percent, what will happen to the cost-minimizing input quantities for a given output level?
Chapter11: Profit Maximization
Section: Chapter Questions
Problem 11.14P
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