7.34. This problem will enable you to apply a revealed preference argument to see if a firm is minimizing the total cost of production. The firm produces output with a technology characterized by a diminishing marginal rate of technical substitution of labor for capital. It is required to produce a specified amount of output, which does not change in this problem. When faced with input prices w, and r₁, the firm chooses the basket of inputs at point A on the following graph, and it incurs the total cost on the isocost line IC. When the factor prices change to w, and r, the firm's choice of inputs is at basket B, on isocost line IC. Basket A lies on the intersection of the two isocost lines. Are these choices consistent with cost- minimizing behavior? K IC₁ A B IC2 L

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7.34. This problem will enable you to apply a revealed
preference argument to see if a firm is minimizing the
total cost of production. The firm produces output with a
technology characterized by a diminishing marginal rate
of technical substitution of labor for capital. It is required
to produce a specified amount of output, which does not
change in this problem. When faced with input prices
w, and r₁, the firm chooses the basket of inputs at point
A on the following graph, and it incurs the total cost on
the isocost line IC. When the factor prices change to
W₂
and the firm's choice of inputs is at basket B, on
isocost line IC,. Basket A lies on the intersection of the
two isocost lines. Are these choices consistent with cost-
minimizing behavior?
K
IC₁
A
B
IC2
L
Transcribed Image Text:7.34. This problem will enable you to apply a revealed preference argument to see if a firm is minimizing the total cost of production. The firm produces output with a technology characterized by a diminishing marginal rate of technical substitution of labor for capital. It is required to produce a specified amount of output, which does not change in this problem. When faced with input prices w, and r₁, the firm chooses the basket of inputs at point A on the following graph, and it incurs the total cost on the isocost line IC. When the factor prices change to W₂ and the firm's choice of inputs is at basket B, on isocost line IC,. Basket A lies on the intersection of the two isocost lines. Are these choices consistent with cost- minimizing behavior? K IC₁ A B IC2 L
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