Suppose over time that a firm’s production process undergoes capital-saving technological progress. This implies

(1) the isoquants corresponding to any particular level of output will shift outward from the origin and the MRTSL,K along any ray from the origin will increase.

(2) the isoquants corresponding to any particular level of output will shift outward from the origin and the MRTSL,K along any ray from the origin will decrease.

(3) the isoquants corresponding to any particular level of output will shift inward toward the origin and the MRTSL,K along any ray from the origin will increase.

(4) the isoquants corresponding to any particular level of output will shift inward toward the origin and the MRTSL,K along any ray from the origin will decrease.

why choose?3??

When a production function can be expressed as q = min{aK, bL}, the relationship between capital and labour in the production function is that

(1) capital and labour are perfect substitutes, and the isoquants are linear.

(2) capital and labour must be combined in fixed proportions, and the isoquants are L-shaped.

(3) capital and labour are easily substituted, and the isoquants are convex to the origin.

(4) capital and labour are perfect substitutes, and the isoquants are L-shaped.

why choose ?2??

Suppose that capital and labour are perfect complements in a one-to-one ratio in a firm’s production function. The firm is currently at an efficient production level, employing an equal number of machines and workers. Suppose the cost of labour were to double and the cost of capital were to fall by half. If the firm wanted to produce the previous level of output, the firm would hire

(1) the same amounts of labour and capital.

(2) twice as much labour as capital.

(3) more labour and less capital.

(4) less labour and more capital.

why choose (1)?

Suppose in a particular production process that capital and labour are perfect substitutes so that three units of labour are equivalent to one unit of capital. If the price of capital is $4 per unit and the price of labour is $1 per unit, the firm should.

(1) employ labour only.

(2) employ capital only.

(3) use three times as much capital as labour.

(4) use three times as much labour as capital.

why choose (1)?

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