Production Function for Wheat

*  Farmers should choose between a capital intensive or labor intensive technique of production.

Isoquant Describing Production of Wheat

*  Observations:

 1) Operating at A:

• L = 500 hours and K = 100 machine hours.

 2) Operating at B

• Increase L to 760 and decrease K to 90 MRTS < 1:

3) MRTS < 1, hence the cost of labor should be less than capital in order for the farmer substitute labor for capital.

4) If labor is expensive, farmer would use more capital (such as U.S.).

5)  If labor is inexpensive, farmer would use more labor (such as India).