Principles of Economics (Second Edition)
2nd Edition
ISBN: 9780393614077
Author: coppock, Lee; Mateer, Dirk
Publisher: W. W. Norton & Company
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Question
Chapter 3, Problem 4QFR
To determine
To explain the distinction between the inferior goods and normal goods.
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Exercise 6
Imagine that you head production of a multinational food processing company. The ongoing uncer-
tainty about costs means that you are unsure of the future cost of one of your inputs, x2. Your firm's
production function is
y = f(x1, x2) = x²x²²
The output price p is 1000, x1 = 27, and wx₁ = 60.
1. Suppose the current input price is Wx2
=
50. Solve for the optimal choice of x2.
2. Now suppose that the probability the input price remains 50 is 0.65 and the probability that
Wx2
60 is 0.35. Solve for the optimal choice of x2. Round down to the nearest integer.
=
3. Finally, suppose the costs do actually rise, i.e., Wx2 = 60. Calculate the difference in profit from
the uncertainty in (2) vs. the certainty in (1).
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Principles of Economics (Second Edition)
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