MRTS and Marginal Productivity

• The change in output from change in labor equals:

• The change in output from change in capital equals:

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

     
Isoquants When Inputs are substitutable



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


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).