Suppose we are given a profit function Q = 12L^.5K^.5. The price of labor is $6 per unit and the...


Suppose we are given a profit function {eq}Q = 12L^.5K^.5 {/eq}. The price of labor is $6 per unit and the price of capital (K) is $7 per unit.

The firm is interested in the optimal mix of inputs to minimize the cost of producing any level of output Q.

In the optimal mix, the ratio of labor to capital is _____.

Profit Maximization:

In standard economic theories, firms are assumed to have the sole objective profit-maximization. The problem of cost-minimization and profit-maximization are called the dual problems.

Answer and Explanation: 1

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At the optimal input mix, the ratio of marginal product is equal to the ratio of input prices, i.e.,

  • {eq}\dfrac{MPL}{MPK} = \dfrac{12 * 0.5...

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Profit Maximization: Definition, Equation & Theory


Chapter 24 / Lesson 6

Learn the profit maximization definition, its importance, and explore the profit maximization theory. See how to calculate profit maximization with examples.

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