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.