Question

1a)you are given that the marginal product of input X is MPx and that of input Y is MPy, what is the marginal rate of technical substitution of Xand Y
b)Given that the prices of X and Y are Px and Py, what is the condition for cost of minimizing input combination?
c)Explain the difference between the concept of marginal physical product and the concept of returns to scale.
d) in oligopoly, game theory can be used to explain the behaviour of firms . explain how two firms can end up in a suboptimal equilibrium in the absence of cooperation

Answer 1

1.

A.

Marginal Rate of Technical Substitution (MRTS) = MPx/MPy

B.

For cost minimizing input combination,

MPx/Px = MPy/Py

C.

Marginal physical product in the change in output due to employing one additional input factor, whereas return to scale deals with the rate of increase in output with respect to the rate of increase in output. Marginal physical product is based on one input factor where other factors are fixed and it happens in short run. But, return to scale takes in long run where all factors of production are variable.

D.

Due to lack of cooperation, initiatives by the firms hurt each other and they end up with losses. For example, due to lack of cooperation, one firm decreases the price. It increases the sale of that firm at a lower price. Now the second firm also reduces the price and sale returns back to the earlier level. But, due to lower price, both firms get lower revenue and can incur losses.