Question

3. Look up the following concepts in your textbook and explain in a few sentences what each one represents or measures: a. Isoquant b. Isocost line c. Marginal product of labor d. Diminishing marginal returns e. Marginal rate of technical substitution f. Returns to scale g. Differentiate between increasing, decreasing and constant returns to scale

Answer 1

1. Isoquants:

• It is a curve which shows all the mixture of inputs that produce the same level of output.
• Isoquants are downward sloping and convex like indifference curves.
• They measures the rate at which capital can replace for labour.

2.Isocost line:

• Isocost line shows all the mixture of inputs having the same total cost.
• It provides all the possible mixture of two factors that are used at a specified costs or for a given expenditure.

3. Marginal product of labour:

It is the growth in total production that occurs when labour increases by a unit while at the same time other inputs remain the same.

4. Diminishing marginal returns:

It expresses that as one input variable is increased, there is a point at which the marginal increase in output starts to decrease holding all other inputs constant.

5.marginal rate of technical substitution:-

• Marginal rate of technical substitution shows the connection between inputs and the trade offs without changing the level of total output.
• It is equivalent to change in capital to change in labour which in turn equals the ratio of marginal product of labour to marginal product of capital.

6.Returns to scale:

• Appears in the firm's production function.It describes the rate of increase in output relative to the increase in inputs in the long run.
• It refers to the rate by which output changes, if all inputs are changed by the same factor.

7.Differentiate between increasing decreasing and constant returns to scale:

• Increasing returns to scale occurs when output increases by a larger quantity than the increase in inputs throughout the production process.
• Decreasing returns to scale occurs when increase in all inputs leads to a less than corresponding increase in output.
• Constant returns to scale occurs when increasing the number of input leads to equal increase in the output.