A production function describes how firms

a. combine capital, labor, and other inputs to create products.

b. determine the profit-maximizing quantity of output.

c. describe demand conditions in their markets.

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Divya SinghLv10

17 Jan 2021

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A price taking firm chooses its inputs to maximize short-run profits. Its Cobb-Douglass production function has the following form: q(L, K) = L^(1/2) K ^(1/3) . The output price is 1,000 per unit and the cost of each unit of input is 10. In the short-run, capital is fixed at 27 units.

(a) Set up the profit function in terms of labor only.

(b) Find the optimal choice of labor, L â .

Another price taking firm chooses its inputs to maximize long-run profits. Labor and capital are substitutes in production and both exhibit decreasing returns to scale, q(L, K) = L^(1/2) + K^(1/2) . The output price is 100 and the price of each of the inputs is 10.

(a) Set up the firmâs profit function and provide the two conditions for profit maximization.

(b) Find the profit maximizing levels of capital and labor.

rosearmadillo753

The short-run aggregate supply curve is upward sloping for all of the following reasons except A) some firms adjust their markup in response to an increase in demand. B) some firms adjust their production in response to an increase in demand. C) some markets are posted-price markets. D) all inputs are fully utilized in the short run.