Question

Explain the law of diminishing marginal returns Isoquants can be convex, linear or L-shaped. What does each shape tell you about the nature of the production function? What does each of these shapes of isoquants tell you about the marginal rate of technical substitution (MRTS)? 2. (a) (b) (c)

Answer 1

a)Law of diminishing marginal returns states that if firms add additional factor of production ,then there is smaller increase in output.For example Increasing workers beyond optimal level will only lead to overcrowding in the factories and less increase in output.

b)Convex isoquants means that we can substitute some units of one input with other without changing the output produced.

Linear isoquants means the inputs are perfect substitutes.

Isoquants are L -shaped , then it means the inputs are perfect compliments that is the production function is leontiff and the technology is fixed proportions.

c)Convex Isoquants -diminishing MRTS as we move down the isoquant

Linear Isoquant - constant MRTS

L shaped isoquant - MRTS is infinity at the portions where the isoquant is vertical and MRTS is 0 where the isoquant is horizontal.