Question

If a firm hires one worker and eliminates four units of capital, and hires one more worker and replaces three more units of capital, keeping output constant, then

A) workers and capital are perfect substitutes.
B) there are decreasing returns to scale.
C) the firm is experiencing a diminishing marginal rate of technical substitution.
D) the firm is operating inefficiently because capital is more efficient than workers.

Answer 1

C) the firm is experiencing a diminishing marginal rate of technical substitution.

Step-by-step explanation:

Isoquant reflects factor combinations which give producer same output level. It is analogous to consumer's indifference curve, reflecting goods combinations giving same satisfaction level.

• It is downward sloping as same quantity of a good can be produced by - one factor increase, other factor decrease & one factor decrease, other factor increase.
• It is also concave i.e inwards bending towards origin, because of fallings slope. It implies that marginal rate of technical substitution (fall in one factor , replaced by gain in other factor) with same level of output i.e same isoquant - keeps on falling.

This concept is highlighted in the given statement : If a firm hires one worker and eliminates four units of capital, and hires one more worker and replaces three more units of capital, keeping output constant.