Business, 12.03.2021 15:30 sbelgirl2000

Sometimes, we are interested in the rate at which the MRTS diminishes. That is, does the slope of the isoquant flatten out quickly or slowly as the capital is replaced with labor? This is measured by the elasticity of substitution σ which is the percent change in the ratio K/L per a percent change in the MRTS: σ = (dK/L /dMRTS) (MRTS/ K/L)

The problem consider the constant elasticity of substitution production function

q = (L^rho + K^rho )^1/rho

Let rho = 1/2 and rho be any arbitrary constant less than one.

Required:
a. Explain what it means if σ is large and what it means if σ is small.
b. Calculate the MRTS of the constant elasticity of substitution production function.
c. Solve for K/L in terms of the MRTS.

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Sometimes, we are interested in the rate at which the MRTS diminishes. That is, does the slope of th...

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