Quiz 15 Cost Minimization2 Ans

Quiz 15 Cost Minimization2 Ans - Shomu Banerjee ECON 201...

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Shomu Banerjee ECON 201 COST MINIMIZATION #2 ANSWERS Suppose a firm has a production function: y = 2 x 1 + x 2 where y is the output and x 1 and x 2 are inputs. (a) In the graph below, an isoquant for y = 8 is shown. The prices of the inputs are w 1 = $1 and w 2 = $2. Draw the isocost line corresponding to an expenditure of $16. See the solid red line. (b) What is the cost-minimizing expenditure for y = 8 when w 1 = $1 and w 2 = $2? Note that the slope of the isocost is -1/2 while the slope of the isoquant is -2. While it is possible to produce at point A using only x 2 =8, this would cost $16. By sliding the red isocost to the left until it just touches the isoquant at B shows that the same output of 8 can be produced using only x 1 =4, costing only $4. Therefore the insight is that so long as the isocost is flatter than the isoquant, using x 1 =4 only at point B is cheaper. (c) What is the cost-minimizing expenditure for y = 8 when w 1 = $8 and w 2 = $2?
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Quiz 15 Cost Minimization2 Ans - Shomu Banerjee ECON 201...

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