Flour (=X₁, in Lbs) and Sugar (=X₂, in Lbs) Are

Essay

Flour (=X₁, in lbs) and sugar (=X₂, in lbs) are used to produce cookies (doz). The price of flour is P₁=$1/lb, and the price of sugar is P₂=$2/lb. Expenditures for the firm are equal to $20. Graph the isocost line, isoquant, and equilibrium for the cookie firm. A. If the price of sugar (P₂) decreased to $1/lb, draw a graph to show how the equilibrium will change. Will the firm hire more or fewer workers? Explain why. B. Graph the optimal combination of the outputs Y₁ = peanut butter cookies (doz) and Y₂ = sugar cookies (doz) for the firm, and demonstrate the impact of an increase in the price of sugar cookies on the equilibrium quantity of PB and sugar cookies.