CA Foundation · Business Economics · Theory of Production and Cost
Along a typical downward-sloping, convex isoquant, as a firm substitutes labour for capital while keeping output unchanged, the marginal rate of technical substitution of labour for capital (MRTS) will:
MRTS falls along a convex isoquant. As more labour replaces capital, labour's marginal product declines while capital's marginal product rises, so each additional unit of labour can replace fewer units of capital while holding output constant.
- ARise, because labour becomes more productive
- BFall, because labour's marginal product declines relative to capital'sCorrect
- CStay constant, because output is unchanged
- DBecome zero immediately
Explanation
Along a convex isoquant, each extra unit of labour replaces fewer units of capital because the marginal product of labour falls and that of capital rises as capital becomes scarcer. Hence MRTS diminishes. Staying constant would describe a straight-line isoquant (perfect substitutes), not a convex one.
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