Question

Consider the following function: where x1 2 0,0,A 0, 0<1. a) Suppose that the preferences of a consumer regarding the consumption of goods x1 and x2 are represented by function = f(x1,x2) above. Suppose also that the consumer is endowed with some disposable income Y > 0 and faces prices pı and p2 respectively for goods x1 and x2. i) Derive and describe the demand of the consumer for goods x1 and x2. [20 marks] i) Are demand functions affected if parameter A increases? Explain your answer [10 marks] b) Suppose that a firm buys goods x and x2 to use them as inputs to produce a final product z and technology is given by z = f(x1,x2). Assuming that the firm has to incur fixed costs F>0 to operate in the market, derive the long run level of costs of this firm when [15 marks] c) Providing economic intuition, explain if you think that function f(x1,x2) above can be used to represent the short run production function of a firm that experiences diminishing [5 marks] using economic intuition. z= 10. marginal productivity with respect to input x1, when input x2 is fixed.

Answer 1