Earl sells lemonade in a competitive market on a busy street corner in Philadelphia. His production function is f(x1, x2) = x1^1/3 x2^1/3, where output is measured in gallons, x1 is the number of pounds of lemons he uses, and x2 is the number of labor-hours spent squeezing them. (i) Does Earl have constant, decreasing, or increasing returns to scale?
(ii) Let w1 and w2 denote the cost of a pound of lemon and the wage rate for lemon squeezers, respectively. Write down Earl’s cost minimization problem.
(iii) Solve Earl’s cost minimization problem.
(iv) What is Earl’s cost function?