Question

A particular firm currently produces 375,000 units of output by using 5,450 units of capital and...

A particular firm currently produces 375,000 units of output by using 5,450 units of capital and 680 units of labor, and the marginal rate of technical substitution (MRTS) of labor for capital is 5 for this company. If the manager of this company wants to produce the same amount of output but decrease the company’s use of capital to 5,200 units, how many units of labor will the company now need to use?

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Answer #1

Production Level - 375000 units

Capital used(K) - 5450 units

Labour used(L) - 680 units

MRTS(L,K) = 5. It implies that 5 units of capital can be replaced by one unit of labour, keeping the level of output unchanged.

MRTS =

Now,

5 = 250/

= 50 units

Hence, the company needs to use 50 more units of labour. New Labour = 680+50 = 730

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