Figure 6A -Under the free disposal assumption, an output maximizing firm using Figure 6A would want to use: A)more than C units of z₁. B)less than A units of z₁. C)at least C units of z₁. D)between A and C units of z₁.

Question

Quizplus · Accepted Answer

Under the free disposal assumption, the firm would want to produce at the point where the marginal rate of technical substitution (MRTS) equals the ratio of prices, which is the slope of the budget constraint. In Figure 6A, the MRTS is steeper than the slope of the budget constraint at point A, so the firm can increase output by using more z₁. However, the MRTS becomes flatter as we move down the isoquant, and at point C, it is equal to the slope of the budget constraint. Therefore, the firm would want to use at least C units of z₁ to maximize output. Using more than C would not be optimal since the MRTS becomes less steep and the firm would be giving up too much of U1 for a relatively small increase in U2. Using less than A units would also not be optimal since the MRTS is steeper than the slope of the budget constraint, meaning the firm can increase output by using more of z₁.

Figure 6A -Under the Free Disposal Assumption, an Output Maximizing Firm Using