Question

Which of the following cost functions exhibits cost complementarity? why? A. -3Q2 + 4Q1 B. 5Q1Q2...

Which of the following cost functions exhibits cost complementarity? why?

A. -3Q2 + 4Q1 B. 5Q1Q2 - Q1 C. Q2Q1 + 2Q1 D. -5Q1Q2 + 7Q1

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Answer #1

The correct answer is (D) -5Q1Q2 + 7Q1

According to definition of cost complementarity, Cost complementarity exist whenever If we increase output of one good then marginal cost of producing other good decreases.

This definition is satisfied by only (D) -5Q1Q2 + 7Q1

Let C = -5Q1Q2 + 7Q1

Hence Marginal Cost of Producing Q1 =

  

=> Marginal Cost of Producing Q1 = -5Q2 + 7

Hence If Q2 increases, Marginal Cost of Producing Q1 decreases

Also Marginal Cost of Producing Q2 =

=> Marginal Cost of Producing Q2 = -5Q1

Hence If Q1 increases, Marginal Cost of Producing Q2 decreases

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