Consider a firm that uses two inputs, labor and capital, to produce its output. Assume labor is measured on the horizontal axis and capital on the vertical axis
Which of the following best explains why the marginal rate of technical substitution decreases in absolute value as we move down an isoquant?
A) The law of imperfect substitutability: labor and capital are not perfect substitutes; therefore, a firm must replace decreases in capital with increases in labor.
B) The law of diminishing returns: for a given decline in capital, decreasing amounts of labor are required to produce the same level of output.
C) The law of increasing marginal opportunity cost: if a firm uses less and less capital it must use more and more labor, which drives up the cost of labor.
D) The law of diminishing returns: for a given decline in capital, increasing amounts of labor are required to produce the same level of output.
D
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Suppose that additional units of capital affect the marginal productivity of labor. This is not unrealistic. Word processors increase the marginal productivity of secretaries
On the other hand, robotic equipment can completely replace a worker and, thereby, lower the marginal productivity of labor. Given this possibility, determine the conditions under which isoquants will not be convex (i.e., concave).
If the interest rate rises to 25% would the investment still take place?
a. Yes since NPV>0 b. No since NPV<0 c. Yes since the present value of the cash flows is greater than zero d. No since the present value of the cash flows is lesser than zero