given that the two factor of production behave as a perfect substitutes to one another in the production process what will be the shape of corresponding isoguant the value of MRTS as we move down along the isoguant
Answers
Answer:
The Formula for the MRTS Is
\begin{aligned} &\text{MRTS(\textit{L}, \textit{K})} = - \frac{ \Delta K }{ \Delta L } = \frac{ \text {MP}_L }{ \text {MP}_K } \\ &\textbf{where:} \\ &K = \text{Capital} \\ &L = \text{Labor} \\ &\text{MP} = \text{Marginal products of each input} \\ &\frac{ \Delta K }{ \Delta L } = \text{Amount of capital that can be reduced}\\ &\text{when labor is increased (typically by one unit)} \\ \end{aligned}
MRTS(L, K)=−
ΔL
ΔK
=
MP
K
MP
L
where:
K=Capital
L=Labor
MP=Marginal products of each input
ΔL
ΔK
=Amount of capital that can be reduced
when labor is increased (typically by one unit)
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In Production Economics,a perfect substitution between the factors/inputs of production implies that the shape of Isoquant would be downward sloping straight line and the value of Marginal Rate of Technical Substitution is constant all along the isoquant.
Explanation:
In a two-factor or input model,a perfect substitution indicates that in the production process,the factors or inputs of production,typically,labor and capital are substituted at a constant rate.In the isoquant,it will denote that firm substitutes labor and capital at a definite or fixed rate to produce a particular amount of output.Hence,this factor substitution is constant,the shape of the isoquant will be a downward sloping straight line as the law of diminishing marginal returns is not functional in this particular case.It basically indicates that to hire more laborers the firm would require proportionate amount of capital inputs,otherwise,the laborers will not be able to work properly.This proportional rate of substitution is constant in the production process as one doesn't replace the other but function together and hence MRTS between labor and capital is also constant.