Production function (economy)

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A company produces one good using two factors of production factors. If $x$ and $y$ denotes the units of the factors used by the company, the technology function is given by $F(x; y) = xy^2$. In the market of the production factors the price of the factor $x$ is 5 but the price of $y$ is unknown. However we can observe that when the total production of the company is $Q = 1000$ units the company uses 10 units of $x$ and 10 units of $y$.

(a) If the company acts rationally (it wants to minimize the cost of the production) which is the price of the factor $y$? (b) Which is the marginal increment of the cost of production if the company decides to (marginally) increase the production?

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First you should convince yourself that the inputs that firm chooses satisfy $xy^2=1000$. If not, i.e. if $xy^2>1000$ then the firm could reduce cost by choosing an $x$ smaller than 10, therefore coming up with an alternative plan $(\tilde{x},\tilde{y})$ that has a smaller cost than $(10,10)$ but that it still guarantees an output at least 1000. Once we establish this we can replace $x=\frac{1000}{y^2}$. This means the firm chooses only $y$ (i.e. by choosing $y$ it implicitly chooses $x$).

Problem is $min \{p_x \frac{1000}{y^2}+p_y y\}$. Here $p_x=5$. First order conditions tell you that $p_y=\frac{10000}{y^3}$. Since $y$ is the optimized value, it is $10$, hence $p_y$is 10.

The answer to your last question is given by the Lagrange multiplier, which after you know prices, you find it as $\lambda=.05$