Question

Exercise 3 10 * K 8 If the firm uses 4 units each of labour and capital, its marginal rate of technical substitution is Based on this firm's isocost lines, if the price of capital is 2, what is the wage? 7 Answer: 6 5 4 Q = 300 Submit Answer 3 Q = 200 2 1 Q = 100 * 0 0 1 2 3 4 5 6 7 8 9 10 What labour-capital combination is the least cost way of producing 100 units? If the price of capital is $3 and the wage is $3, how much does this combination cost the firm? L Answer: The straight lines in this figure represent and the curved lines represent Answer: Submit Answer Submit Answer

Answer 1

1. The straight line in the figure represents isocost line and the curved line represents the isoquant.

2. When firm uses 4 units each of capital and labour then the firm is on isoquant curve Q = 200 and the isocost curve is that is tangent to the isoquant curve.

$\large MRTS = \frac{\triangle K }{\triangle L}$

$\large MRTS = \frac{4 - 8}{4 - 0} = - 1$

Note; MRTS is always a negative number.

The cost of capital = $ 2 per unit

And MRTS = - 1

Therefore, maximum capital that can be hired = 8 and maximum number of labour hired = 8.

Therefore, per person can bring huge changes.

3. That labour capital combination where isoquant curve is tangent to the isi cost curve. Thus the optimal combination is

3 units of labour and 3 units of capital.