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If the government chooses to tax the consumption of good 1, and if all the firms...

If the government chooses to tax the consumption of good 1, and if all the firms producing
this good use positive amounts of labor and capital, do the firms have the same marginal
rates of technical substitution? Explain why the equality of the marginal rates of technical
substitution is necessary for Pareto eciency, but not suffcient.

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Answer #1

answer :

Marginal rate of technical substitution : is the rate which shows that to increase use of one factor of production we need to decrease use of another factor means to achieve same level of output how much one unit is substituted for another input.

Yes the marginal rate of technical substitution will be same for the firm, if government chooses to tax the consumption of good1, and if all the firms producing this good use positive amount of labour and capital.

The equality of the marginal rate of technical substitution is necessary for pareto efficiency for proper allocation of resources so that they can achieve more out with less inputs and the marginal rate of substitution will be equal that means increase in the production of one good will not reduce the quantity of another good.

* hope it will help you.

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