Which of the following statements is true?
A)In the short run all inputs are fixed.
B)In the long run a firm is making the optimal input choice when the marginal rate of technical substitution is equal to the input price ratio.
C)Diminishing returns to labor means that adding one more worker will decrease output.
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

In the long run, a firm has the flexibility to adjust all its inputs. It can expand or contract its production capacity. Therefore, in the long run, a firm is making the optimal input choice when the marginal rate of technical substitution (MRTS) is equal to the input price ratio. MRTS is the rate at which a firm can exchange one input for another while keeping the level of output constant. The input price ratio is the ratio of the prices of two inputs. When MRTS is not equal to the input price ratio, a firm can improve its production efficiency by adjusting the input mix. When MRTS is greater than the input price ratio, a firm will substitute the input that is relatively cheaper for the input that is relatively more expensive. When MRTS is less than the input price ratio, a firm will substitute the input that is relatively more expensive for the input that is relatively cheaper.

Which of the Following Statements Is True