(Solved):   1. With the help of a well-illustrated diagrams, show and clearly explain: a) How a firm m ...

 

1. With the help of a well-illustrated diagrams, show and clearly explain: a) How a firm maximizes profits given cost constraints i.e \( \operatorname{Max} X=f(L, K) \), Subject to \( \hat{C}=w L+r K \) b) How a firm minimizes costs given a certain level of output i.e Minimize \( \mathrm{C}=\mathrm{wL}+\mathrm{rK} \) Subject to \( \quad \ddot{X}=f(L, K) \) c) How relative factor prices and factor productivity determine optimal input combination. Show clearly how the maximizing output and optimal inputs combinations are achieved in the two cases. 2. With the help of a well labeled diagram, show and explain; a) The substitution and income effect of a price increase in the case of a normal good b) How does the substitution effect help explain the law of demand? 3. The short-run and long-run average cost functions of a firm are generally U-shaped. This implies high unit costs of production at very low and high levels of output. (a) Illustrating you answer with appropriate diagrams, discuss the reasons/factors behind the u-shaped short-run average cost (SAVC) curves of a producing firm. (b) Discuss in detail the factors/causes behind the u-shaped long-run average cost curves (LATC) of a producing firm