07 Jun Question The Marginal Rate of Technical Substitution
Question
The Marginal Rate of Technical Substitution
The figure below illustrates the MRTSL,Kfor the isoquant Q = 1000. At point A the slope is -2.5 which means that MRTSL,K= 2.5. Thus we can substitute 1 man-hour labor for 2.5 machine-hour of capital.
Besanko, Braeutigam: Microeconomics, 3rd Edition
MIcroeconomics 3e / Fig06-10 bensenko 10/2/2007
7/22/08 10:19 PM
Problem 4:
Sam’s company produces output with labor and capital. At the current quantities of labor and capital, the following information is obtained: the output produced by spending one more dollar on labor exceeds the output produced by spending one more dollar on capital. In the long run, is Sam minimizing costs? If not, explain how capital and labor should change (holding output constant) and how this relates to the MRTS=w/r condition.
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