Question

A profit-maximizing competitive firm produces a single output, y, using Input 1 and Input 2. The price of output rises by $3 per unit, and the price of Input One increases by $2 (price of Input 2 remains the same). The firm increases its use of Input One by 6 units Since the firm is a profit maximizer; a. The amount used of Input 2 did not change b. The amount used of Input 2 must have increased by at least 6 units c. The amount of output produced must have decreased by at least 6 units d. The amount used of Input 2 must have decreased by at least 4 units e. The amount of output produced must have increased by at least 4 units plz explain thx

Answer 1

A profit-maximizing competitive firm produces a single output, Y, using X1 andX2. PY rises by $3 per unit, and PX1 increases by $2 while PX2 remains the same.

With the increase in the price of PX1 and no change in PX2, firm increases X1 by 6 units. It appears that the increase in the price of the input is increasing its usage. To maximize profit, this event should result in a revenue at least as much as the increase in cost. Cost is increased by $2*6 = $12. Revenue earned is increased by 3*Q. Since revenue > or = cost for profit maximization, we must have 3Q > or = 12. This gives Q > 4.

Option E is correct. E. The amount of output produced must have increased by at least 4 units