Question #112778

A firm has the following function Q = 2(xy)^0.5 where x is maize and Y is rice. The cost of maize is k10 and the cost of rice is k40 the firm has a budget of k80 to spend on two goods.

i). Formulate the firms optimization problem

ii). Compute the optimal input combination of x and y

iii). What level of output is associated with the optimal input combination

iv). What is the impact of a k1 increase in the budget

i). Formulate the firms optimization problem

ii). Compute the optimal input combination of x and y

iii). What level of output is associated with the optimal input combination

iv). What is the impact of a k1 increase in the budget

Expert's answer

Solution:

i)

"P_xQ_x+P_yQ_y=I"

ii)

iii)

iv)

An increase in budget for k1 will lead to a decrease in budget for k2

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