5. Henry uses a furnace and fuel to produce heat. The furnace can use EITHER coal(L)...

5. Henry uses a furnace and fuel to produce heat. The furnace can use EITHER coal(L) or wood(K) to produce heat. 1 Unit of coal produces 5 unites of heat and 1 unit of wood produces 2 units of heat.

a) Draw the isoquants for q=20 and q=40 units of heat on a graph

b) What is the MRTSlk? what does this tell you about the two inputs?

Expert Solution

This furnance can use either coal (L) and wood (L) to produce heat. Thus here coal and wood are perfect substitute. When factors of prooduction are perfect substitute, Isoquant is straight line.

In the figure above shown are isoquant of the production of heat by furnance.

AB line represent isoquant which produced 20 units of heat. When it uses 4 units of L, it produces (4*5) 20 units of heat. When it uses 10 units of K, it produces (10*2) 20 units of heat.

CD line shows the isoquant which produce 40 units of heat. When it uses 8 units of L, it produces (8*5) 40 units of heat. When it uses 20 units of K, it produces (20*2) 40 units of heat. Both the isoquants are parallel to each other showing constant K/L ratio.

b) As the factors of production are perfect substitute, MRTS_l,k is constant. Isoquant of perfect substitute s are linear in nature, thus slope does not change althrough the isoquant.

MRTS_l,k=

Rahul Sunny answered 1 year ago

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