Consider a firm that uses two inputs, labor and capital, to produce its output. Assume labor is ...

Consider a firm that uses two inputs, labor and capital, to produce its output. Assume labor is measured on the horizontal axis and capital on the vertical axis. Which of the following best explains why the marginal rate of technical substitution decreases in absolute value as we move down an isoquant?

• The law of diminishing returns: for a given decline in capital, decreasing amounts of labor are required to produce the same level of output.

• The law of increasing marginal opportunity cost: if a firm uses less and less capital it must use more and more labor, which drives up the cost of labor.

• The law of diminishing returns: for a given decline in capital, increasing amounts of labor are required to produce the same level of output.

• The law of imperfect substitutability: labor and capital are not perfect substitutes; therefore, a firm must replace decreases in capital with increases in labor.