Asked by Zahra Al-Radwan on May 12, 2024
Verified
If the production function is f(x, y) min12x, 3y, then there is convexity in production.
Convexity
In economics and finance, convexity refers to the shape of the curve that demonstrates how the duration of a bond changes as the interest rate changes.
Production Function
An equation that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs.
Input
Resources used in the production process to create goods or services, including labor, materials, and capital.
- Comprehend the meaning and implications of convexity in production functions.
Verified Answer
f(αx1+(1-α)x2, αy1+(1-α)y2) ≤ αf(x1, y1) + (1-α)f(x2, y2)
where α is a scalar parameter between 0 and 1, and (x1,y1) and (x2,y2) are two different input combinations.
In this case, we can verify that the production function satisfies the above condition for any values of (x1,y1) and (x2,y2), and for any value of α between 0 and 1. Therefore, we can conclude that the production function is convex.
Learning Objectives
- Comprehend the meaning and implications of convexity in production functions.
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