Answer to Question #41664 in Economics of Enterprise for Mushfik Ahmed
2. When estimating a demand function, explain why fitting a line of best fit through observed price and quantity combinations over time is not likely to yield good estimates.
3. If a firm uses only capital and labour, show why the cost minimising combination of inputs sets: .
2. A line of best fit (or "trend" line) is a straight line that best represents the data on a scatter plot.
This line may pass through some of the points, none of the points, or all of the points. As it is a straight line it gives only average estimates, so this method is not very correct.
3. The least-cost combination of inputs occurs at the point where the marginal rate of substitution between the inputs equals the ratio of their prices.
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