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In: Economics

Consider a firm that operates using only a single variable input, labor (denoted ℓ). The production...

Consider a firm that operates using only a single variable input, labor (denoted ℓ). The production function of this firm is given by:
Φ(ℓ)=?=2√ℓ
where ? denotes output. The firm is a price-taker in both the output market and the input market for labor. Each unit of labor costs the firm ?>0. The market price for the firm’s output is given by ?>0.

Show that the firm’s profit function is ?∗(?,?)=?2?. Show that ?∗(?,?) is homogeneous of degree one and interpret this result.

Derive the comparative statics terms ??∗/??, ??∗/??, ?ℓ∗/??, and ?ℓ∗/?? and interpret these results.

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Rahul Sunny answered 1 year ago
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