Q1. Given production function f(x,y)= (cx^[a+b])(y^[b-a])where a, b, c are positive and b>a,
a. Discuss the returns to scale, marginal product of inputs, and technical rate of substitution. Show that whether they are increasing, constant, or decreasing?
b. Given the cost of x and y are w and u, and the price of output is p, find out the best inputs levels that would benefit you the most.
Q2. Use a model of the money market to explain why changes in nominal or money GDP are associated with changes in interest rates. Theoretically, how could changes in the money supply be used to keep interest rates at the same level?