Question

A firm’s production function is q = 12 x0.50 y 0.50, where x and y are the amounts of factors x and y that the firm uses as inputs. If the firm is minimizing unit costs and if the price of factor x is 5 times the price of factor y, the ratio in which the firm will use factors x and y is closest to:

a. x/y = 0.20.

b. x/y = 0.40.

c. x/y = 1.

d. x/y = 1.67.

e. x/y = 5.

Answer 1

The answer is E.

Explanation:

The firm minimizing the cost of production when the input value x is 5 time bigger than y. At the point firm is making maximum profit, then firm need to preserve this ratio. Therefore when the ratio of x/y=5 is the closest ratio that the firm can minimize the cost of the production.