Question

These are all True/False questions and require a concise explanation.

Consider a consumer. We can monotonically transform his utility function u, and his decisions will remain the same. Similarly, we can monotonically transform a firms production function and the firm’s input decisions will remain the same.

Consider the cost minimization problem. Suppose that a firm's production requirement is doubled and its input prices are halved. The firm's total cost will say the same.

Suppose that factor demands weren’t homogeneous of degree zero in factor prices. Inflation would have strange consequences on firms.

Answer 1

Answer 1:- False.

Utility function transformation of a consumer if happened monotonically or alone will change his demand or his decisions regarding consumption of that good. Because the willingness to pay for a certain good depends upon the utility that the consumer derives from it. If the utility increases consumption will happen even at higher prices similarly if utility diminishes consumer will be willing to pay less for the same good.

Production function of a firm relates the firms physical output to its factors of production or the inputs used in production. Thus if production function of a firm will be transformed it will have an impact on its input decisions. If more production is required inputs will be increased and vice versa.

Answer 2:- True.

Total cost of a firm is the function of quantity required and price of input. Here the production is doubled but at the same time input cost is halved. Therefore there will be no change in the total cost of the firm. But the average cost of the firm will reduce.