MRTS

You are hired to consult a company. The production function is Q=1000K*L. Given that the financial
markets are tight, firms find it difficult to obtain fresh capital and find it easier to hire more workers. You
have calculated the marginal rate of technical substitution of labour (MRTSL) and the returns to scale. The
data shows:
a) MRTSL equals L/K, returns to scale are increasing.
b) MRTSL equals K/L, returns to scale are decreasing.
c) MRTSL equals 1/2, returns to scale are increasing.
d) MRTSL equals K/L, returns to scale are increasing.
e) MRTSL equals L/K, returns to scale are increasing.
f) None of the statements is correct: MRTSL equals ________, returns to scale are _________.
Calculations:
2. Graphically derive the expansion curve if the firm has the standard Cobb-Douglas technology. Briefly
explain it! How does the expansion curve look if capital and labour are perfect substitutes? Draw!