Question: A firm’s production function is: Q = K^1/2L^1/2 and the demand for its output is: Q = 300-10P.

a) If the firm’s wage rate is $10/hour and capital rental rate is $2.50/hour, what is its optimal output, inputs, price, and profit?

b) If now the wage rate rises to $22.50, what will be its output, inputs, price, and profit?

c) Explain this change in terms of output and factor substitution effects.

d) Are these normal or inferior inputs?