Marginal rate of technical substitution and productivity, Microeconomics

MRTS and Marginal Productivity

  • The change in output from change in labor equals:

                   2186_marginal productivity.png

  • The change in output from change in capital equals:

                   251_marginal productivity1.png

  • If output is constant and labor is increased, then:

     760_marginal productivity2.png
Isoquants When Inputs are substitutable

1120_marginal productivity3.png

Perfect Substitute

*  Observations when inputs are substitutable:

 1) The MRTS is constant at all the points on isoquant.

 2) For the given output, any combination of inputs can be chosen (A, B, or C) to generate the same level of output (for example toll booths & musical instruments).

Fixed-Proportions Production Function

1605_production function.png
Fixed-Proportions Production Function

- Observations when inputs should be in a fixed proportion:

1) No substitution is possible. Each output needs a specific amount of each input   

(for example labor and jackhammers).

2)To increase output needs more labor and capital (that is moving from A to B to C which is efficient technically). 

Posted Date: 10/12/2012 1:48:39 AM | Location : United States

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