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Turn out to be true even though he was right about

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Unformatted text preview: century, technological progress has dramatically altered the production of food in most countries, including many developing countries, so that the marginal product of labor has increased. These improvement include new high-yielding and disease-resistant strains of seeds, better fertilizers, and better harvesting equipment. Food production overall throughout the world has outpaced population growth more or less continually since the end of World War 2. 4 Hunger remains a severe problem in some areas in part because of the low productivity of labor force. Although other countries can export agricultural products to these areas, mass hunger still occurs because of the difficulty of redistributing foods to remote places and because of the low incomes of those less productive regions. 3.4 Marginal Rate of Technical Substitution Firms using more than two inputs for production needs to consider the best combinations of these inputs to maximize profits. Skilled workers (say university graduates) and less skilled workers may be quite substitutable for providing simple services, for example those in Tim Hortons or in MacDonald. In contrast, they may not be so substitutable in a workplace which requires advanced analytical skills. The marginal rate of technical substitution is the key concept to describe the ”substitutability” of production inputs. Suppose that we are operating with some input combination ( x1 , x2 ) and that we consider giving up a little bit of factor 1 and using just enough more of factor 2 to produce the same amount of output y. How much extra of factor 2, D x2 , do we need if we are going to give up a little bit of factor 1, D x1 ? This is just the negative of the slope of the isoquant D x2 , which is commonly referred to as the marginal rate of technical D x1 substitution, and denoted by MRTS12 : MRTS12 = D x2 D x1 output is held constant (2) The marginal rate of technical substitution measures the tradeoff between two inputs in production. It measures the rate at which the firm will have to substitute one input for another in order to keep output constant. To relate the formula for the MRTS to marginal products, we can use the same idea that we used to determine the slope of the indifference curve. Consider a change in our use of factors 1 and 2 that keeps output xed. Then we have Dy = 0 = MP1 D x1 + MP2 D x2 (3) which we can solve to get MRTS12 = 3.5 D x2 D x1 = D y =0 M P1 MP2 D y =0 (4) Returns to Scale Now let’s consider a different kind of experiment. Instead of increasing the amount of one input while holding the other input fixed, let’s increase the amount of all inputs to the production function. In other words, let’s scale the amount of all inputs up by some constant factor: for example, use twice as much of both factor 1 and factor 2. If we use twice as much of each input, how much output will we get? The most likely outcome is that we will get twice as much output. This is called the case of constant return...
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