A businessperson produces two distinct products, Q1 and Q2, using two different production methods. The entrepreneur complies with the equilibrium condition for each good, and the production function for each is CES. Assume that Q1 has a lower value for the parameter than Q2 and a higher elasticity of substitution than Q2. The input price ratio at which the input use ratio would be the same for both goods is to be determined. Which good would have a higher ratio of inputs if the ratio of input prices were lower? Which would be more frequently used if the price-to-use ratio were higher?

A businessperson produces two distinct products, Q1 and Q2, using two different production methods. The entrepreneur complies with the equilibrium condition for each good, and the production function for each is CES. Assume that Q1 has a lower value for the parameter than Q2 and a higher elasticity of substitution than Q2. The input price ratio at which the input use ratio would be the same for both goods is to be determined. Which good would have a higher ratio of inputs if the ratio of input prices were lower? Which would be more frequently used if the price-to-use ratio were higher?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter10: Cost Functions

Section: Chapter Questions

Problem 10.12P

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