Rate of technical substitution-labor and capital services

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Reference no: EM131004499

Suppose that a firm is using quantity k of capital input and quantity l of labor input to produce output level q0. Further suppose that, at this input combination, the rate of technical substitution (RTS) is 2. Assume also that w = $1 and v =$1, where w and v are the rental rates at which this firm buys its labor and capital services. This firm can reduce its cost of producing output level q0 by:

a. reducing labor input use by 1 unit and increase capital input use by ½ unit.

b. reducing labor input use by 2 units and increase capital input use by 1 unit.

c. reducing capital input use by 2 units and increase labor input use by 1 unit.

d. reducing capital input use by 1 unit and increase labor input use by 1 unit.

Explain your answer.

Reference no: EM131004499

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