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    Assignment, IQ Convex, Sufficient Cond.

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    SEEMAL JAMIL
    Isoquants are usually assumed to be convex and obey diminishing returns to scale. This assumption of diminishing returns is necessary but not sufficient for convex isoquants. Convexity requires that as one input increases, it decreases the marginal productivity of the other inputs. An increase in labor accompanied by a decrease in capital would lower the marginal productivity of labor, raise the marginal productivity of capital, and lower the rate of technical substitution between the inputs. The sufficient condition for convex isoquants is that the rate of technical substitution decreases as labor increases.

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    Assignment, IQ Convex, Sufficient Cond.

    Uploaded by

    SEEMAL JAMIL
    16 views4 pages
    Isoquants are usually assumed to be convex and obey diminishing returns to scale. This assumption of diminishing returns is necessary but not sufficient for convex isoquants. Convexity requires that as one input increases, it decreases the marginal productivity of the other inputs. An increase in labor accompanied by a decrease in capital would lower the marginal productivity of labor, raise the marginal productivity of capital, and lower the rate of technical substitution between the inputs. The sufficient condition for convex isoquants is that the rate of technical substitution decreases as labor increases.

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    Assignment, IQ Convex, Sufficient Cond. (1)

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    Isoquants are usually assumed to be convex and obey diminishing returns to scale. This assumption of diminishing returns is necessary but not sufficient for convex isoquants. Convexity requires that as one input increases, it decreases the marginal productivity of the other inputs. An increase in labor accompanied by a decrease in capital would lower the marginal productivity of labor, raise the marginal productivity of capital, and lower the rate of technical substitution between the inputs. The sufficient condition for convex isoquants is that the rate of technical substitution decreases as labor increases.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    16 views4 pages

    Assignment, IQ Convex, Sufficient Cond.

    Uploaded by

    SEEMAL JAMIL
    Isoquants are usually assumed to be convex and obey diminishing returns to scale. This assumption of diminishing returns is necessary but not sufficient for convex isoquants. Convexity requires that as one input increases, it decreases the marginal productivity of the other inputs. An increase in labor accompanied by a decrease in capital would lower the marginal productivity of labor, raise the marginal productivity of capital, and lower the rate of technical substitution between the inputs. The sufficient condition for convex isoquants is that the rate of technical substitution decreases as labor increases.

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    of 4

    Advanced Microeconomic Theory

    Assignment # 3
    Q. Isoquants are usually assumed to be convex and they obey the
    assumption of a diminishing RTS. This assumption is necessary but
    not sufficient for convexity of Iso quant, explain it with the effect of
    changes in one input on the marginal productivity of other inputs.

    Isoquants are usually assumed to be convex and they obey


    the assumption of a diminishing RTS:
    Isoquant curve:
    An isoquant curve is a curve which shows those combinations of Labor and
    capital which can produce a specific level of output.
    This curve shows the possible substitutions of one input for another in a
    production function. Mostly the production function that is used is
    q = f (k, l)
    with the understanding that “capital” and “labor” are simply convenient
    examples of any two inputs that might happen to be of interest.

    Isoquant Map:
    Each isoquant represents a different level of output. A curve higher than
    previous one, represents respectively higher production level. While
    combinations of l and k , A and B, shows same level of production.
    The slope of the curves in above isoquant map, shows the rate at which l
    can be substituted for k while keeping output constant. The negative of
    this slope is called the marginal rate of technical substitution (RTS).
    The RTS ( l for k) is equal to the ratio of the marginal physical
    productivity of labor (MPl) to the marginal physical productivity of
    capital (MPk).
    Mathematically:
    RTS (l for k) =- dk /dl = MPl / MPk= fl/fk
    Isoquants that are drawn in above fig. are not only negatively sloped but
    also convex as they obey the assumption of a diminishing RTS. At point
    A, with high k/l, RTS gives higher value, showing that to get one more
    unit of labor, large amount of capital can be given up. At point B, with
    low k/l, RTS gives lower value as lot of labor is being used here and
    capital is in small amount, hence more labor can be traded for little
    amount of capital if output is to be held constant.

    Effect of changes in one input on the marginal productivity


    of other inputs:
    We see in the above figure, that along an isoquant, the gain in output
    from increasing l is exactly balanced by the loss in output from suitably
    decreasing k. But this increase in one input accompanied by decrease in
    other input (holding output constant) affects the marginal productivity
    of both inputs and also the RTS. An increase in l accompanied by a
    decrease in k would result in a decrease in MPl, an increase in MPk, and
    also a decrease in the RTS.
    Changes in the marginal productivity of labor over time depend not
    only on how labor input is growing but also on changes in other inputs,
    such as capital.
    Hence, we see that, the assumption of diminishing RTS is necessary but
    not sufficient for convexity of Iso quant. It is not possible to derive a
    diminishing RTS from the assumption of diminishing marginal
    productivity alone.
    That’s why we need :
    ∂MPL /∂k = flk
    and mostly flk > 0

    Sufficient condition for convexity of Iso quant:


    To show that isoquants are convex, we show that
    d(RTS)/dl < 0
    we assume here that fk and fl are positive, also fkk<0 and fll<0
    As mentioned above: RTS=fl/fk
    we have
    dRTS/dl=d(fl/fk)/ dl
    dRTS/dl= fk(fll+flk . dk/dl)- fl(fkl+fkk. dk/dl)/(fk)2
    As dk/dl= -fl/fk
    dRTS/dl= fk^2.fll -2fk fl fkl +fl^2 .fkk/(fk)^3
    As assumed above, fk > 0, the denominator of this function is positive.
    Hence the whole fraction will be negative if the numerator is negative.
    Because fll and fkk are both assumed to be negative, the numerator
    definitely will be negative if fkl is positive. Thus, we see that if we can
    assume this, it is proved that dRTS/dl < 0, Which shows that isoquants
    are convex.

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