Topic 3: Production

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8 Terms

1
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MRTS formula differential

dK/dL where K is on the y-axis and L is on the x-axis

2
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What do we have when MRTS is constant

Perfect substitutes

3
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When the production process is such that trade-offs are impossible and capital and labour must be used in fixed proportions

Perfect complements

4
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MRTS formula marginal products

-MPL/MPK where K is on the y-axis and L is on the x-axis

5
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Why is it efficient for a firm to produce at where MPL/MPK = w/r

because at that point:

  • The marginal output per pound spent on labour equals that of capital.

  • The firm has no cost-saving substitution left to do.

  • The isoquant is tangent to the isocost.

  • The production of Q is achieved at minimum cost.

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