Consider a firm that uses two inputs, labour and capital, to produce its output.Assume labour is measured on the horizontal axis and capital on the vertical axis.Which of the following best explains why the marginal rate of technical substitution decreases in absolute value as we move down an isoquant?
A)The law of diminishing returns: For a given decline in capital, decreasing amounts of labour are required to produce the same level of output.
B)The law of increasing marginal opportunity cost: If a firm uses less and less capital it must use more and more labour, which drives up the cost of labour.
C)The law of diminishing returns: For a given decline in capital, increasing amounts of labour are required to produce the same level of output.
D)The law of imperfect substitutability: Labour and capital are not perfect substitutes; therefore, a firm must replace decreases in capital with increases in labour.

Question

Quizplus · Accepted Answer

The law of diminishing returns states that for a given increase in one input (capital) while holding other inputs (labour) constant, the marginal product of the variable input (capital) will eventually decrease. Therefore, as we move down an isoquant, meaning the firm is using less capital and more labour, the marginal product of capital is decreasing, and more labour is required to produce the same level of output. This results in a decrease in the absolute value of the marginal rate of technical substitution (MRTS).

Consider a Firm That Uses Two Inputs, Labour and Capital