Discussion
The producer will substitute capital for labour till he reaches that point of isoquant at which,
Answer: D
The producer keeps substituting capital for labour until the marginal rate of technical substitution equals the ratio of the marginal productivities of labour and capital. Along an isoquant the MRTS is the slope, equal to MP of labour divided by MP of capital, and the cost-minimising point is where this slope matches the factor price ratio. Option A is wrong because the output price is not compared with the wage rate in this condition. Option B is wrong because the MRTS is a ratio of two factor prices, not a single interest rate. Option C is wrong because marginal revenue belongs to the output side and enters the profit maximising condition, not the choice of input mix along one isoquant.
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