Question

3-What is does the term “marginal rate of technical substitution” refer to? Illustrate.

Answer 1

3.

MRTS or marginal rate of technical substitution refers to the number of decrease in one input if one unit of another input is increased, without changing the level of output. So, by keeping the level of output at a constant level, change in level of one input due to change in level of another input is considered as MRTS. It can from the following example.

Output level	Labor units	Capital units
100	4	6
100	8	5
100	12	4
100	16	3

As per the above example, 100 units of output is produced by different combination of two input factors of production. Here, if one unit of capital is increased from 5 to 6, then there is a decrease of 4 unit of labor from 8 to 4, to achieve the same level of output of 100 units. Thus, decrease of 4 unit of labor to increase the 1 unit of capital, is referred as MRTS.