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Two Variable Inputs

long run - allows for 2 (or more) variable inputs  

  • diminishing marginal returns shown by drawing horizontal or vertical line through isoquant map
    • shows that each increased unit of capital or labor adds less and less to the total output

marginal rate of technical substitution (MRTS) - like MRS for consumers  

  • amount of capital that can be decreased by an extra unit of labor, for a given output level
  • MRTS = -DK/DL = MPL/MPK
    • MP = marginal product (partial derivatives of the production function w/ respect to either labor L or capital K)
  • units of labor decrease the required capital less and less >> diminishing MRTS
    • isoquants are convex >> magnitude of the slope decreases (gets more flat) >> ratio of capital (vertical axis) to labor (horizontal) falls

 

  • isoquant
  • equivalent changes in labor lead to less and less change in capital >> diminishing MRTS
Subject: 
Economics
Subject X2: 
Economics

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