CES production function
### CES Production Function
Definition: The Constant Elasticity of Substitution (CES) production function is a flexible functional form used to represent the relationship between inputs and output. It generalizes the Cobb-Douglas and Leontief production functions by allowing varying degrees of substitutability between inputs.
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If production function is given by
(i) Calculate the elasticity of output with respect to labor (L)
(ii) Calculate the elasticity of output with respect to capital (K)
(iii) What kind of returns to scale does it exhibit?
Consider a market for good X represented by the following demand function, q = 125– 20 P. Now assume the market price of this good to be Rs. 5, calculate
a) The initial consumer’s surplus at market price of Rs. 5.
b) The change in consumer’s surplus when price falls to Re 1.
c) The gain due to fall in price to the consumers who could buy at old price of Rs. 5 (that is, the gain to the old buyers); also the gain to the new buyers of good X at lower price of Re 1.
What is meant by “Cost Minimisation”? Explain how a rational producer maximizes his profits using Isoquant and Isocost line.
Certainty Equivalent
Compensating Variation
Differentiate between Risk aversion and Risk neutrality. How does insurance help in reducing risk? Show with an example.
Decompose the Price Effect into Slutsky Substitution and Income effect for an inferior commodity. Use diagram to show the same