Question

1. Which best characterizes our interpretation of the profit maximizing firm’s optimality condition.

The firm wishes to equate marginal product with the cost to use each input.

The firm chooses an amount of input X such that the cost to employ an additional unit of that input equals the market price of the output produced.

The firm chooses an amount of input X such that the value obtained by employing the last unit of that input equals the cost to employ the last unit of that input.

The firm optimally employs an amount of input X sufficient to make the value obtained to exceed the cost of employing those inputs.

2. Assume a firm employs 10 workers and pays each $15 per hour. Further assume that the MP of the 10th worker is 5 units of output and that the price of the output is $4. According to economic theory, in the short run

the firm should hire additional workers.

the firm should reduce the number of workers employed.

the firm should continue to employ 10 workers.

More information is required to answer this question.

3. Paradise Bakery uses two inputs to produce cookies according to a production function given by f(x₁,x₂) = 4(x₁)^1/2 +x₂. Cookies sell at $90 per crate. Input 1 costs $60 per unit and input 2 costs $20. If input 2 is fixed at x₂ = 10, the profit maximizing amount of x₁ is

9

16

18

22

36

None of these are correct.

4. An orange grower has discovered a process for producing oranges that requires two inputs. The production function is Q= min{2x₁, x₂}, where x₁ and x₂ are the amounts of inputs 1 and 2 that they use. The prices of these two inputs are w₁ = $8 and w₂ = $3, respectively. The minimum cost of producing 140 units is therefore

140

280

700

980

1400

None of these are correct.

Answer 1

1)A profit maximizing firm will use optimality condition to employ inputs for production.

The optimality condition for employing the input is that the the amount of output produced by that unit of input known as marginal product should be equal to the cost of using each input(input price).

The firm will not chosen amount of input x such that the cost to employ an additional unit of that input equals the market price of the output produced because the firm does not bring market price of output in deciding how much input to employ.

Moreover the form will not equate the value of output to the price or cost of each input. Neither it will choose To employ an input in such a way that the value obtained by employing the input exceeds the cost of input.

Therefore, the profit-maximizing firm's optimality condition is that the firm wishes to equate marginal product with the cost of use of each input.

Thus, First Option is correct.