Consider the Cobb-Douglas production function F(L,K)= AL^aK^b.Which of the following statements is true? A) Increases in a increase labour's productivity and raise MRTS_LK B) Decreases in a increase labour's productivity and raise MRTS_LK C) Increases in a increase labour's productivity and lower MRTS_LK D) Changes in a will not affect MRTS_LK

Question

Quizplus · Accepted Answer

According to the Cobb-Douglas production function, an increase in the parameter a results in an increase in labour's productivity. This means that, given a level of capital, an increase in labour input will result in a more than proportionate increase in output. As a result, the marginal rate of technical substitution for labour (MRTS) will increase, as firms will substitute relatively more labour for capital. Therefore, higher productivity raises MRTS.

Consider the Cobb-Douglas Production Function F(L,K)= ALaKb

Consider the Cobb-Douglas Production Function F(L,K)= AL^aK^b