Section6

Question 1

What is an isoquant in production theory?

Answer 1

Function representing all possible combinations of factor inputs that can produce a given level of output.

Question 2

What is the Marginal Rate of Technical Substitution (MRTS)?

Answer 2

• Rate at which one factor input can be substituted for another at a given output level.
• Formula: MRTS = ∆K/∆L = 1.25

Question 3

What is the isocost line?

Answer 3

• Shows combinations of factor inputs that can be purchased with a given budget.
• Formula: TC = P_LL + P_KK

Question 4

Define the Principal-Agent Problem in cost theory.

Answer 4

• Conflict of interest between firm owners (principals) and managers (agents).
• Asymmetric information leads to inefficiency.

Question 5

What is X-Inefficiency?

Answer 5

Deviations from cost minimisation due to non-rational management decisions, influenced by selective rationality.

Question 6

Explain Behavioural Agency Theory.

Answer 6

• Agents are boundedly rational and loss-averse.
• Combines selective rationality and principal-agent theory.

Question 7

Describe the Substitution Method for optimisation.

Answer 7

Substitution Method is a technique for solving two-variable constrained optimisation problems by substituting constraints into the objective function.