Production - Production in the long run
3 important questions on Production - Production in the long run
In the long run, all factors of production are by definition variable. With both K and L variable , we now require three dimensions instead of two. Solution = isoquants:
The set of all input combinations that yield a given level of output. An isoquant map provides a concies representation of a production process. The number we assign to an isoquant corresponds to the actual level of output we get from an input bundle along that isoquant.
The analogous concept of the MRS in production theory is the marginal rate of technical substitution (MRTS). This is:
The rate at which one input can be exchanged for another without altering the total level of output; dK/dL. Holding output constant, the less we have of one input, the more we must add of the other input to compensate for a one-unit reduction in the first input.
On the isoquant, the reduction in output from having less K is exactly offset by the gain in output from having more L, so mathematically it follows that:
MPka x dK = MPla x dL. Cross multiplying: MPla/MPka = dK/dL
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