Question content area
Part 1
Explain why the marginal rate of technical substitution is likely to diminish as more and more labor is substituted for capital.
Part 2
A.
The substitution of labor for capital increases the
MP Subscript Upper LMPL
and decreases the
MP Subscript Upper KMPK.
Since the MRTS is the ratio of the former to the latter, it will diminish as this substitution occurs.
B.
The substitution of labor for capital decreases the
MP Subscript Upper LMPL
to a greater extent than it increases the
MP Subscript Upper KMPK.
Since the MRTS is the product of the former and the latter, it will diminish as this substitution occurs.
C.
The substitution of labor for capital decreases the
MP Subscript Upper LMPL
and increases the
MP Subscript Upper KMPK.
Since the MRTS is the ratio of the former to the latter, it will diminish as this substitution occurs.
D.
The substitution of labor for capital increases the
MP Subscript Upper LMPL
and decreases the
MP Subscript Upper KMPK.
Since the MRTS is the ratio of the latter to the former, it will diminish as this substitution occurs.