Question

The following graph shows the isoquant representing the combinations of capital and labor needed to produce 10 left-handed can openers. Assume that diminishing marginal returns characterize the production function. (Hint: click a point on the graph to see its coordinates.) 500 450 400 360 300 LABOR (Workers) 260 + 200 160 + * 100 50 o 12 3 18 15 o 21

Answer 1

see the graph while reading the answers.

i have tabulated L-K combinations of all points

points	labor	capital
I	250	6
J	150	12
K	100	18
L	50	27

1. from I to J, capital increases by (12-6)=6 and labor decreases by (150-250)=100

2. from K to L,capital increases by (27-18)=9 and labor decreases by (50-100)=50

3. from point I to L, increase in marginal physical product of labor and decrease in marginal physical product of capital. see last three columns of following table. the rate at which labor is substituted by capital is decreasing

4. it will become difficult to replace labor with machines as more machines will be needed to repalce another unit of L.

5. this rate of (change in capital/change in labor) is called Marginal rate of substitution.

points	labor	capital	change in labor	change in capital
I	250	6	…	…
J	150	12	-100	6
K	100	18	-50	6
L	50	27	-50	9

change in output from increasing capital = change in output from decreasing labor

6. in general increase in capital should increase output

7. decrease in labor should decrease output.

8. change in output from change in capital MPK.ΔK

9. change in output from change in labor MPL.ΔL

10. change in output from increasing capital = change in output from decreasing labor

MPK.ΔK = - MPL.ΔL

as labor is decreased, change in labor is -ΔL.

absoulte value of ΔL/ΔK = MPK/MPL