Answer to Question #211445 in Microeconomics for Saurav

Question

(b) A farmer rents a fixed plot of land L which can be used to produce two crops, food crop y1 and fodder y2. The production functions (technology) of the two crops are given as follows:

y1= A L1^α K1^β 0< (α + β) < 1

y2= min [aL2 , bK2] a, b >0

The per unit rent for land L is t and the price per unit of capital K is r.

(c) Assume that the farmer wants to produce a fixed amount of fodder at a feasible level y2^0. He decides to allocate L2 amount of land for the cultivation of this crop. If the land constraint is exactly met, show how would you derive the cost function for food C1(.), and that of fodder C2(.) ?

(d) Check if the Shephard's Lemma holds for these cost functions.

(e) If the farmer gets additional land through land reform policy implementation by the state government and the assumption of land constraint is slightly modified as L1 + L2 < L, how does your answer to question (c) change? Explain.

Answer 1

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