Table 7-3 shows the combinations of labor and capital required to produce various level of output.
Refer to Table 7-3.If the firm is currently producing 26 units of output using three units of labor,what is the marginal rate of technical substitution of labor for capital at this point?
A)-1
B)-2
C)-3
D)-4

Question

Table 7-3 shows the combinations of labor and capital required to produce various level of output. 
Refer to Table 7-3.If the firm is currently producing 26 units of output using three units of labor,what is the marginal rate of technical substitution of labor for capital at this point?
A)-1 
B)-2 
C)-3 
D)-4

Quizplus · Accepted Answer

To calculate MRTS, we need to calculate the slope of the isoquant (constant output) at the point where the firm is currently producing 26 units of output using three units of labor.

At this point, the firm is using four units of capital. Moving to the right along the isoquant, if the firm wants to keep output constant, it must reduce one unit of capital and hire more labor to compensate.

Moving from the point (3,4) to (4,3), the change in labor (ΔL) is -1 and the change in capital (ΔK) is 1.

Therefore, MRTS = ΔK/ΔL = 1/(-1) = -1.

This means that for every one unit decrease in capital, the firm must increase labor by one unit to maintain the same level of output. Therefore, the firm can lower costs by replacing one unit of capital with one unit of labor.

Thus, the best choice is to increase labor and decrease capital.

Table 7-3 Shows the Combinations of Labor and Capital Required