Question

What are similarities and differences between Marginal rate of Substitution (MRS) and Marginal rate of Transformation...

What are similarities and differences between Marginal rate of Substitution (MRS) and Marginal rate of Transformation (MRT)?

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Answer #1

Marginal Rate of Transformation (MRT) is related to production possibility curve. It is the slope of the production possibility curve. MRT tells us how much quantity of good X should be given up for one additional unit of good Y, other things like production factors and technology remaining the same.

It is the opportunity cost of one good in terms of another. MRT =dx/dy

Marginal rate of substitution is the slope of the indifference curve. It tells us how much of good Y is necessary to substitute for good X for a consumer.

Optimal consumption for a consumer is when MRS equals the price ratio of the two goods.

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