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Production and new technology

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A country has a fixed amount of Capital and Labor (K*, L*) which lies on an aggregate isoquant when all inputs are being used efficiently. The input prices wages (w) and rental rate of capital (r) adjust so that all factors of production are utilized.

There is a change in technology that makes labor more productive.

Question: How is the isoquant for (K*, L*) different after the change in technology?
Is because there was a technological change the country is able to produce more which shifts the isoquant line to the right correct?

Question: What will happen to the input prices wages (w) and rental rate of capital (r) after this change in technology?

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Solution Summary

The solution discusses how a change in technology causes changes in isoquant and input prices.

Solution Preview

First question:
Remember the slope isoquant is the marginal rate of technical substitution (RTS). This slope will change with new technology.

Second question:
Remember the substitution effect. A ...

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