Question

True or False

a.) The marginal productivity of labor and capital is negative in the uneconomic region of production.

b.) If the cross-price elasticity of demand between two goods is ‘zero’, then the two goods are perfect substitutes

Answer 1

Answers:

a) The marginal productivity of labor and capital is negative in the uneconomic region of production - True

In the above figure, labor(L) is measured on the horizontal axis, and capital(K) is measured on the vertical axis.The curve IQ is the isoquant curve, that shows same level of output produced by different combinations of labor, and Capital.The isoquant curve is negatively sloped convex to origin curve.Along the negatively sloped convex region of isoquant, the marginal productivity(MP) of inputs,marginal productivity of labor(MP_L) , and marginal productivity of capital(MP_K) are positive.So the increase in the number of one input increases the total output, and the decrease in the number of other input decreases the total output. The increase in output must be equal to the decrease of output, so that the total output remains unchanged.This region of isoquant is called the economic region(EC), i.e., marginal productivity of the factors is positive.In the figure, the economic region is shown by green shaded area on 'XV' portion of isoquant. Beyond this region, the isoquant curve is positively sloped and backward bending.In this region, the marginal productivity of factors is negative. If we keep the level of capital constant, then beyond point 'V', the MP_L is negative. If we keep the number of labor constant, then beyond point 'X', the MP_K is negative. This region is called uneconomic(UEC) region.

So, the marginal productivity of labor and capital is negative in the uneconomic region of production.

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b)  If the cross-price elasticity of demand between two goods is ‘zero’, then the two goods are perfect substitutes - False.

If the cross-price elasticity of demand between two goods is ‘zero’, then the two goods are non-related goods.The change of price of one good doesn't impact the quantity demanded of another good.

Example : Cooking oil, and Coffee. The change of price of cooking oil doesn't affect the quantity demanded for coffee.

In case of perfect substitute goods, the cross-price elasticity of demand for two goods is positive..

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