Using two factors of production, namely, Labour (L) and Capital (K), a firm will be in equilibrium at the point where ___________.
Marginal Productivity of L = Marginal Productivity of K
[Marginal Productivity of L/Price of L] = [Marginal Productivity of K/Price of K]
Price of L = Price of K
[Marginal Productivity of L/Price of K] = [Marginal Productivity of K/Price of L]
Answers
Answer:
The law of diminishing returns
We define the marginal productivity of an input variable – which in the present case of labor we will indicate with P
′
L
– as the change in output due to a very small change of the input under consideration, with the use of all other inputs remaining constant. Symbolically:
P
′
L
=
Δy
ΔL
We define the average productivity of an input variable as the ratio between the output obtained and the overall quantity used of the input, with the use of all other inputs remaining constant. Symbolically:
APL=
y
L
With these definitions as a base it is now easy to derive the marginal and average productivity curves for an input once its total productivity curve is known. Fig. 4.2 geometrically illustrates the connection in question. As we can see, up to the point that the curve TPL is convex (point F in Fig. 4.2) the curve P
′
L
is ascending; from the point at which TPL begins to be concave, P
′
L
begins to descend. Finally, when TPL reaches its maximum point (point T in Fig. 4.2), P
′
L
goes to zero (the curve P
′
L
intersects the x-