Suppose that labor is measured on the horizontal axis and capital is measured on the vertical axis.At an interior solution: A) MRTS_LK = P_L/P_K. B) MRTS_LK = - P_L/P_K. C) MRST_LK = P_K/P_L. D) MRTA_LK = - P_K/P_L.

Question

Quizplus · Accepted Answer

MRTS_LK = P_L/P_K.At an interior solution, the marginal rate of technical substitution (MRTS) between labor and capital is equal to the ratio of their prices. This is because the firm is maximizing its output for a given level of inputs, and it will do so by hiring labor and capital in such a way that the MRTS is equal to the price ratio.

Suppose That Labor Is Measured on the Horizontal Axis and Capital