A competitive, profit-maximizing firm uses two inputs a and b.Its production function is F(a, b)= a1/2 +a1/2.Its output sells for $5 per unit.The price of input a is $1 per unit.If the price of output rises to $6 per unit but factor prices do not change.
A)it will increase its purchases of factor a by 11/4 units.
B)it will increase its purchases of factor a by 9/4 units.
C)it will increase its purchases of factor a by 3/4 units.
D)we need to know the price of factor b to be able to determine the change in demand for a.
E)None of the above.

Question

Quizplus · Accepted Answer

The firm's profit-maximizing condition is MRTS = P_a/P_b. With the output price rising to $6, MRTS will increase, leading to an increase in the demand for factor a. The exact change in demand for a depends on the price of factor b, but it will be greater than 3/4 units.

A Competitive, Profit-Maximizing Firm Uses Two Inputs a and B