Question

Carlos sells lemonade in a competitive market on a busy street corner in Los Angeles. His production function is f(x1; x2) = x1^1/3x2^1/3 where output is measured in gallons, x1 is the number of pounds of lemons he uses, and x2 is the number of labor-hours spent squeezing them.

(a) Does Carlos have constant returns to scale, decreasing returns to scale, or increasing returns to scale?

(b) What is the long-run cost minimization condition?

(b) Given that w1= 4, w2=9, what are cost minimizing levels of x1 and x2 in order to produce 10 units of output?

Answer 1