Question

1. A frequent assumption that economists make about production functions is that the marginal rate of technical substitution (MRTS) is diminishing. (a) Explain the intuition behind this assumption; is it a reasonable assumption to make? Why or why not? (b) Describe (or show) what an isoquant would look like if this assumption were violated. Interpret. (c) In the two-good production function q = f(k. 1), the assumption of a diminishing marginal rate of technical substitution can be expressed as SMRTS .<0. al

Answer 1

Maginal lali of Technicalubutitutien (MRTS) the rate at which a capital can be ubstihutc pu say labour or the othel hile keeptng Ouutpur by the iame lurel It is erepresented an ts0uant lope ddee at a chesen pont the absolue value MRTS is diminishing (he isoquanr is tenvex ls the igin because as more unils of labour aie empbyed, MP will ameunt capital is eguired be foregome 4 henee aleeer rr compensating it utther, as leset unts capital remath in the productien, MPk will sise Yes, it is a reasonable capitalA CP) MRTS AK LK ofdimplion as all the arl not equaly AL AK AL frient din the producten labour

Nhun diminishing Cb) MRTS ivoilutcd Case tmpul's Case 2 Pesfect Subsiuks Pafet are Inpuls Complamens are K MRTS MRTS-0 MRIS

MPTS L To Mow 20 Ce) Vince MRTS =f or MPL MPK d MRTS LK di dk dL DMRTSK + di 2 tsing alny an iopuant Youngs fifex dk theorem dMRTS LK t L tK 2 fr Alo fuk fe> O dMRIS O