MRTS: Understanding Capital-Labour Substitution on Isoquants
The question asks for the concept that measures how much capital a firm can reduce when using one more unit of labour while maintaining the same output level. This is directly related to the production inputs and firm behavior.
Identifying the Correct Concept
The concept described is the Marginal Rate of Technical Substitution (MRTS). Specifically:
- MRTS measures the rate at which a firm can substitute one input (e.g., capital) for another (e.g., labour) along an isoquant.
- An isoquant represents combinations of two inputs (like capital and labour) that yield the same level of output.
- The MRTS at any point on the isoquant indicates how many units of capital must be sacrificed to employ one additional unit of labour, without changing the total output.
- The term 'Diminishing' refers to the typical shape of isoquants (convex to the origin), meaning the amount of capital given up for each additional unit of labour decreases as more labour is substituted.
Analyzing Incorrect Options
- Diminishing Marginal Rate of Substitution (MRS): This concept applies to consumer theory, measuring the trade-off between two goods for a consumer to maintain the same level of utility. It does not apply to production inputs.
- Economic Trade-off Region: This is a broader term and doesn't specifically define the rate of substitution between capital and labour on an isoquant.
- Diminishing Marginal Utility (MU): This concept relates to consumer satisfaction, stating that the additional satisfaction from consuming one more unit of a good decreases. It is irrelevant to production decisions.
Therefore, the Diminishing Marginal Rate of Technical Substitution accurately measures the capital-labour trade-off needed to remain on the same isoquant.
Important Questions from Production Function
What is constant along an isoquant?
During the first stage of a total product curve, the total product is ______
Match List I with List II
LIST I
(Production Cost)
LIST II
(Underlying Meaning)
A.
Implicit Costs
I.
Change in the total cost per unit change in output.
B.
Marginal cost
II
Total increase in costs resulting from the implementation of a particular managerial decision.
C.
Incremental Cost
III.
Inputed value of inputs owned and used by the firm.
D.
Sunk Cost
IV.
The costs that are not affected by managerial decision.
Choose the correct answer from the options given below:
For the following two statements of Assertion (A) and Reasoning (R) suggest the correct code:
Assertion (A): Low initial price regarded as the principal means for entering into mass market for some new products.
Reasoning (R): Firms generally enter into production of new products with excess capacity of the plant initially.
Code:
Indicate the correct code from the following types of the long run average cost curves on which the minimum average cost of production in long run can be determined:
(i) Long run average cost curve under normal production function
(ii) Long run average cost curve under linearly homogeneous production function
(iii) Planning curve
(iv) Envelope curve
Choose the correct answer from the code given below :
