Question

Two companies, X and Y, are competitors in the same industry, but company X is more efficient at using its resources than company Y

. a. If the MRTS is the same in the production processes of both companies, show and discuss how the isoquants will be different for company X than they are for company Y.

b. Both companies can hire labor at the same wage, w, but company X is able to pay a lower rent per unit on its capital. Show and discuss how these company’s relative uses of labor and capital will be different from one another and why.

Answer 1

Marginal product;

Marginal product of a factor of production refers to addition to total product due to the use an additional unit of that factor. Thus, the Marginal Product of Labour (MP_L) or Marginal Physical Product of labour ( MPP_L) is given by the change in TP due to a one unit change in the quantity of labour used. MP is derived by finding the derivative of he TP.

Where K is capital.

Marginal Rate of Substitution (MRS);

MRS is term used in the indifference curve analysis to represent the amount of one good the consumer is willing to give up for getting an additional unit of the other good. For consumer who uses two goods X and Y, Marginal Rate of Substitution of x for y (MRS_xy) is the amount of good y that the consumer is willing to give up to get one additional unit of good x.

Marginal Rate of Technical Substitution (MRTS);

Marginal Rate of Technical Substitution (MRTS) is the rate at which one input can be substituted for another without changing th level of input. Marginal rate of Technical Substitution between labour and capital is the absolute value of the change in capital that results from a one unit change in labour when output is held constant. This can be written as:

MRTS_LK

a) An isoquant curve slopes downward, or is negatively sloped. this means that the same level of production only occurs  when increasing units of input are oft with lesser units of another input factor. This property falls in line with the principle of the Marginal Rate of Technical Substitution (MRTS) As an example , the same level of output could be achieved by a company when capital inputs increases, but labour inputs decreases.

b) An isocost line shows the various combinations of two factors a firm can buy, given the total outlay of he firm and factor prices. Isocost means equal cost. Thus if the two inputs are labour and capital, the isocost line represents the different combinations of labour and capital that a firm can purchase, given he total money outlay of the firm and factor prices. The slope of an Isocost curve is equal to the ratio of the input prices P_L/P_K. If input prices are fixed, all isocost lines are parallel.