2) Show that second-order conditions for cost minimization are weaker than second-order conditions for profit maximization.

Expert Solution

The firm's profit maximization problem is solved by the selection of the optimal quantities of employed inputs and output to produce. The two stages involved in the profit maximization problem are minimizing costs of producing any given amount of output, and then finding how to choose the most profit table output level. Thus we can say that the cost minimization is a necessary condition for profit maximization in competitive markets. Thus if at a given level of output, if a firm is not cost minimizing that means that firm is also not maximizing the profits. The conditions for cost minimization are harder and weaker because it generally has the constraint (f(x1; x2) = y) is a non-linear function of x1 and x2 thus certain times it may be difficult to express x2 in terms of x1 from it and plug into the equation of the cost minimization. This the cost minimization concern is being solved for a provided output level which is not necessarily the optimized one that the firm will eventually select

Rahul Sunny answered 3 months ago

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