MRS & MRTS - capital would lead to decreased efficiency...

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Federico Nuymowicz Lecture 6 Question Similarly to the MRS of an indifference curve, the MRTS falls as the firm substitutes L for K. Why? If labor (L) and capital (K) were perfect substitutes, the MRTS would remain constant for any range of substitutions, since MRTS would be 1:1 at all times. However, since that is rarely the case in any firm, MRTS most often varies: a large substitution of labor in the place of
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Unformatted text preview: capital would lead to decreased efficiency (since the Isoquous line would no longer reach the highest possible Isoquant curve), in turn causing the MRTS to fall to 1:x, x>1; in essence, as more units of labor are traded for units of capital, a unit of capital becomes increasingly more valuable for the firm (as related to labor), which causes a decline in MRTS....
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This note was uploaded on 06/26/2008 for the course ECON S-10ab taught by Professor Medoff during the Summer '07 term at Harvard.

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