Marginal Rate of Technical Substitution

Definition

The marginal rate of technical substitution (MRTS) is a measure of the rate at which one factor of production can be substituted for another, while keeping the level of output constant. It represents the slope of the production isoquant and reflects the tradeoff between two inputs in the production process.

5 Must Know Facts For Your Next Test

1. The MRTS measures the slope of the production isoquant, which reflects the tradeoff between two inputs in the production process.
2. The MRTS decreases as more of one input is substituted for the other, indicating diminishing returns to the substitution.
3. The MRTS is used to determine the optimal combination of inputs to minimize the cost of production for a given level of output.
4. The MRTS is affected by the production technology and the relative prices of the inputs.
5. The MRTS is an important concept in the analysis of production decisions in the long run, where all inputs are variable.

Review Questions

• Explain how the marginal rate of technical substitution (MRTS) is related to the production isoquant.
  • The MRTS is directly related to the production isoquant because it measures the slope of the isoquant, which represents the rate at which one input can be substituted for another while keeping the level of output constant. The MRTS reflects the tradeoff between the two inputs in the production process, and its value decreases as more of one input is substituted for the other, indicating diminishing returns to the substitution.
• Describe how the MRTS is used to determine the optimal combination of inputs to minimize the cost of production.
  • The MRTS is used in conjunction with the relative prices of the inputs to determine the optimal combination of inputs that minimizes the cost of production for a given level of output. The optimal combination is achieved when the MRTS is equal to the ratio of the input prices, as this ensures that the marginal cost of producing an additional unit of output is the same regardless of which input is used.
• Analyze how the MRTS is affected by changes in production technology and input prices, and explain the implications for production decisions in the long run.
  • The MRTS is affected by changes in production technology and input prices. Improvements in technology that increase the productivity of one input relative to another will lead to a decrease in the MRTS, as the firm can substitute more of the more productive input for the less productive one. Similarly, changes in input prices will affect the MRTS, as firms will adjust their input mix to minimize costs. In the long run, when all inputs are variable, the MRTS is a crucial consideration in production decisions, as firms seek to optimize their input mix to achieve the lowest possible cost of production for a given level of output.

Related terms

Production Isoquant: A production isoquant is a curve that shows the different combinations of two inputs that can produce the same level of output.

Diminishing Marginal Rate of Technical Substitution: The diminishing MRTS refers to the phenomenon where the rate at which one input can be substituted for another decreases as the mix of inputs changes.

Factors of Production: The inputs used in the production process, such as labor, capital, land, and entrepreneurship, are known as the factors of production.