Author Question: If the marginal product of labor is equal to 5 and the marginal product of capital is 2, what is the ... (Read 131 times)

krzymel · **on:** Jun 29, 2018

If the marginal product of labor is equal to 5 and the marginal product of capital is 2, what is the marginal technical rate of substitution?

What will be an ideal response?

Question 2

Suppose that you and your four siblings are given an opportunity to purchase a video rental store. Each of you would put up 50,000 . The revenue from the store is expected to remain 350,000 per year for the next several years.

The costs (not including the opportunity costs of your investment) of operating the store are expected to remain steady at 320,000 for the next several years. The current market rate of interest is 5 percent per year. Should you go in on this deal? Explain.

Gabe · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The marginal rate of technical substitution is the ratio of the marginal product of labor to the marginal product of capital. Thus, the marginal rate of technical substitution would be 5/2 or 2.5.

Answer to Question 2

The expected profit from the store is 30,000 per year. If the profits are divided equally among the five partners, this amounts to 6,000 per year. This is a 12 percent rate of return on the initial 50,000 investment. Since the expected rate of return is greater than the market rate of interest, you should go in on the deal.