Question

If a firm hires one worker and eliminates four units of capital, and hires one more...

If a firm hires one worker and eliminates four units of capital, and hires one more worker and replaces three more units of capital, keeping output constant, then

Question 13 options:

A)

 workers and capital are perfect substitutes.

B)

 there are decreasing returns to scale.

C)

 the firm is experiencing a diminishing marginal rate of technical substitution.

D)

 the firm is operating inefficiently because capital is more efficient than workers.
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Homework Answers

Answer #1

C) The firm is experiencing diminishing Marginal Rate of Technical Substitution.

FACTOR COMBINATION LABOUR CAPITAL COMMODITY X MRTS LABOUR FOR CAPITAL
A 1 15 150 -
B 2 11 150 4:1
C 3 8 150 3:1
D 4 6 150 2:1
E 5 5 150 1:1

The above table showing operation of the diminishing MRTS

MRTS is defined as the rate at one factor substituted for another factor while holding another factor constant.

The tables show in order to produce more units X commodity by employing additional units of labor units through reducing the capital units.

It indicates that all combination of production A, B, C, D, E. yielding the same level of output through operation of diminishing MRTS.

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