Firms and production - Marginal rate of technical substitution
6 important questions on Firms and production - Marginal rate of technical substitution
What does the slope of the isoquant indicate in economic theory?
- Represents the ability to replace inputs.
- Shows how a firm can substitute one input for another.
- Uses assumption of ceteris paribus (all else equal).
What does the Marginal Rate of Technical Substitution (MRTS) represent in economic theory?
- MRTS represents the rate at which one input can be reduced per additional unit of another input, maintaining constant output.
- It is the negative ratio of marginal products: \(-\frac{MPL}{MPK}\).
- \(dK/dL\) shows the input substitution rate while staying on the same isoquant.
Define Marginal Rate of Technical Substitution (MRTS).
- MRTS measures input substitution flexibility.
- It's the slope of an isoquant at a specific point.
- Formula: \(\text{MRTS} = \dfrac{-\Delta K}{\Delta L} = \dfrac{-dK}{dL}\).
- Indicates substitution of capital (K) for extra units of labor (L).
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How is the MRTS calculated for an isoquant?
- Substitute \(K(L)\) into the isoquant equation.
- Yields: \(\bar{q} = f(L, K(L))\).
- Differentiate the isoquant with respect to labor (L).
Explain the concept of diminishing MRTS in economic theory.
- Diminishing MRTS: As labor \( L \) increases, replacing capital \( K \) with labor becomes harder.
- Observation: As \( L \) increases, MRTS magnitude decreases.
- Conceptual Outcome: Optimizing resource allocation between inputs.
What is the economic intuition behind the diminishing MRTS?
- Intuition:
- - Greater \( L \) makes substituting \( K \) with \( L \) less effective.
- - Efficiency alters as input proportions change.
- Practical Implication: Balancing inputs optimizes production efficiency.
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