Consider a perfectly competitive ï¬rm that produces output usinga wellbehaved production function y = f(x1,x2). Let the price ofoutput be denoted by p, the price of input 1 be denoted by w1, andthe price of input 2 be denoted by w2.
(a) State the ï¬rm’s cost-minimization problem, and draw thesolution to the cost minimization problem on a graph.
(b) What are the solutions to the cost-minimization problem? Whatare these solutions called? Which variables are these solutions afunction of?
(c) Which 2 conditions must be satisï¬ed for an input bundle to beconsidered cost minimizing, assuming an interior solution? Why?Explain your answer.
(d) Derive the ï¬rm’s cost function. What role do your answers inpart (b) play in deriving the cost function?
