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Question 1 [20 marks]
This question refers to the relationship between two
optimization problems.
Maximize(Π=Π(L,K))
where:
Total
Profit→Π=Π(L,K)=TR-TC
Total Revenue→TR=P×Q,
Q=f(L,K)
←Production function
Total Cost→TC=w×L+r×K
The solution to this problem requires
MRTS=w/r
The objective function is
Total Cost→TC=w×L+r×K
and the constraint is
f(L,K)=Q*
←Prescribed output
level
The solution to this problem also requires
MRTS=w/r
The following statement:
“If the firm is maximizing profits, then it is
minimizing costs; and vice versa, if the firm is minimizing costs
it is maximizing profits.”
consists of two parts:
Part 1: Profit maximization cannot exist without cost
minimization, and
Part 2: Cost minimization cannot exist without profit
maximization.
One part is true while the other is false.
Your Task Please read
carefully
To gain marks you have to justify your
answer.