the production function is f(x₁, x₂)=x^1/2₁x^1/2₂.If the price of factor 1 is $14 and the price of factor 2 is $7, in what proportions should the firm use factors 1 and 2 if it wants to maximize profits? A)x₁ = 0.50x₂. B)x₁ =x₂. C)We can't tell without knowing the price of output. D)x₁ = 2x₂. E)x₁ =7x₂.

Question

Quizplus · Accepted Answer

The correct answer is A because the marginal rate of technical substitution (MRTS) is equal to the ratio of the prices of the two factors. In this case, the MRTS is equal to x₁/x₂, and the ratio of the prices is 14/7 = 2. Therefore, the firm should use factors 1 and 2 in the proportion x₁ = 0.50x₂.

The Production Function Is F(x1, X2)=x1/21x1/22

The Production Function Is F(x₁, X₂)=x^1/2₁x^1/2₂