Please provide working-out/ explanation for the correct answer. 1. Consider a fi

Question

Please provide working-out/ explanation for the correct answer.

1. Consider a firm with a production function f(r1, /2). The firm sells its output for a price of p per unit, and pays w, per unit for input i (-1,2). In the short run, input 2 is fixed at T2. If the firm has chosen to use a quantity of input l such that means that: ef(r1???, this (a) The profit is maximised (b) The firm can make more profit by using more input 1 ( *** c) The firm can make more profit by using less input 1 (d) The firm can make more profit by making more output (e) The firm can make more profit by making less output ***

Explanation / Answer

Consider the given problem here the production function is given by, “Y=f(X1, X2)” and output price and input price are given by “P” and “Wi” respectively. So, the profit functions is given by.

=> profit = P*Y - W1*X1 - W2*X2. Now, because “X2” is fixed implied only choice variable is “X1”. So, the profit maximizing condition is “d(profit)/dX1 = 0”, => P*dY/dX1 = W1”.

=> dY/dX1 = W1/P, where “Y=f(X1, X2)” be the production function.

Now, if “df(X1, X2)/dX1 < W1/P, => profit is not maximum, => here the firm can make more profit by using less input 1, => "df(X1, X2)/dX1" will increase and the equality will established. So, here “C” be the correct option.

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