The slope of the isoquant at any point measures the

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Unformatted text preview: lity of the firm to replace capital with labor while maintaining the same level of output. On isoquant q2, the MRTS falls from 2 to 1 to 2/3 to 1/3. Fig 06-05.EPS PHALL-82241 PINDYCK CHAPTER 06 page 9 of 12 FIGURE 6.6 Isoquants When Inputs Are Perfect Substitutes Capital per year A B C q1 q2 q3 Labor per year When the isoquants are straight lines, the MRTS is constant. Thus the rate at which capital and labor can be substituted for each other is the same no matter what level of inputs is being used. Points A, B, and C represent three different capital-labor combinations that generate the same output q3. Fig 06-06.EPS PHALL-82241 PINDYCK CHAPTER 06 page 10 of 12 FIGURE 6.7 Fixed-Proportions Production Function Capital per year q3 C q2 B K1 A L1 q1 Labor per year When the isoquants are L-shaped, only one combination of labor and capital can be used to produce a given output (as at point A on isoquant q1, point B on isoquant q2, and point C on isoquant q3). Adding more labor alone does not increase output, nor does adding more capital alone. Fig 06-07.EPS PHALL-82241 PINDYCK CHAPTER 06 page 11 of 12 FIGURE 6.8 Isoquant Describing the Production of Wheat Capital (machine hours per year) 120 A 100 ∆K = �10 90 B 80 Output = 13,800 Bushels per Year ∆L = 260 40 250 500 760 1000 Labor (hours per year) A wheat output of 13,800 bushels per year can be produced with different combinations of labor and capital. The more capital-intensive production process is shown as point A, the more labor-intensive process as point B. The marginal rate of technical substitution between A and B is 10/260 = 0.04. Fig 06-08.EPS PHALL-82241 PINDYCK CHAPTER 06 page 12 of 12 FIGURE 6.9 Returns to Scale Capital (machine hours) Capital (machine hours) A A 6 30 4 20 4 2 30 2 20 10 0 5 10 (a) 10 15 Labor (hours) 0 5 10 Labor (hours) (b) When a firm’s production process exhibits constant returns to scale as shown by a movement along line 0A in part (a), the isoquants are equally spaced as output increases proportionally. However, when there are increasing returns to scale as shown in (b), the isoquants move closer together as inputs are increased along the line. Fig 06-09.EPS...
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