Question

(a) What is the rule for the optimal use of (3) resources in production? (b) Explain what the rule means in simple English.

Answer 1

Answer)

Answer A)  The marginal rate of technical substitution denotes the rate at which a firm can change one input to another one without losing output. This rate plays an important in specifying the optimal mix of inputs used in production.

The rule for determining the optimal use is that the marginal rate of technical substitution is equal to the ratio of prices, for any two sources that are utilized in production. To see why this is the example, remind that the marginal rate of technical substitution is equal to the ratio of marginal product. Therefore, when the ratio of marginal product is equal to the ratio of prices, each dollar spent on different sources creates the same marginal product, thus the firm has no purpose to change the mix of resources, i.e., the current use of resources is optimal. Slope of indifference curve equals Marginal rate of substitution which is equal to the slope of budget line i.e Px / Py.

B) Rule description is - a prescribed manual for conduct or action.

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