Question

Carefully explain the difference between the marginal rate of substitution and the marginal rate of transformation. Be sure to explain the economic meaning of each of these terms. What value does each of them take? (Your answer should be in terms of marginal utility and/or prices.)

Answer 1

Both MRS and MRT talk about the same thing, that is giving up one unit of a good for some units of other, however from different perspectives.

MRT focusses on supply while MRS on demand.

MRT tells how much should a producer give up producing a good in order to produce more of another good.

MRS tells how much should a consumer substitute one good to get one more unit of another good.

MRS is measured in terms of Marginal utility and is the ratio of MU of both goods while MRT is ratio of prices of goods produced.