The production function is f(x 1 , x 2 ) = x 1/2 1 x 1/2 2 .If the price of factor 1 is $10 and the price of factor 2 is $15, in what proportions should the firm use factors 1 and 2 if it wants to maximize profits?A) x 1 = 1.50x 2 .B) x 1 = x 2 .C) x 1 = 15x 2 .D) x 1 = 0.67x 2 .E) We can't tell without knowing the price of the output.

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The production function is f(x 1 , x 2 ) = x 1/2 1 x 1/2 2 .If the price of factor 1 is $10 and the price of factor 2 is $15, in what proportions should the firm use factors 1 and 2 if it wants to maximize profits?A) x 1  = 1.50x 2 .B) x 1  = x 2 .C) x 1  = 15x 2 .D) x 1  = 0.67x 2 .E) We can't tell without knowing the price of the output.

liseth gonzalez · Accepted Answer

Final Answer : A, Explanation :  The profit-maximizing condition is MP 1 /P 1  = MP 2 /P 2 . Substituting the given production function and factor prices, we get:(1/2)x 1 -1/2 x 2 1/2  / 10 = (1/2)x 1 1/2 x 2 -1/2  / 15Simplifying, we get:x 1  = 1.5x 2

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