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Marginal Rate of Technical Substitution

The marginal rate of technical substitution (MRTS) measures the amount of input L that a firm needs to exchange for a small decrease in input K while maintaining the same output level. It is calculated as the negative change in K over the change in L. The MRTS is related to marginal products, where the ratio of marginal product of L to marginal product of K equals the negative change in K over the change in L. Isoquants become convex as marginal rates of technical substitution diminish with increasing quantities of inputs.

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473 views2 pages

Marginal Rate of Technical Substitution

The marginal rate of technical substitution (MRTS) measures the amount of input L that a firm needs to exchange for a small decrease in input K while maintaining the same output level. It is calculated as the negative change in K over the change in L. The MRTS is related to marginal products, where the ratio of marginal product of L to marginal product of K equals the negative change in K over the change in L. Isoquants become convex as marginal rates of technical substitution diminish with increasing quantities of inputs.

Uploaded by

rajapatna
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© © All Rights Reserved
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MARGINAL RATE OF TECHNICAL SUBSTITUTION

Marginal Rate of Technical Substitution


Definition: The marginal rate of technical substitution measures the amount of an
input, L, the firm would require in exchange for using a little less of another input, K, in
order to just be able to produce the same output as before.
MRTSL,K = -K/L (for a constant level of output)
Marginal products and the MRTS are related:
MPL(L) + MPK(K) = 0
=>

MPL/MPK = -K/L = MRTSL,K

The rate at which the quantity of capital that can be decreased for every unit of
increase in the quantity of labor, holding the quantity of output constant,

The rate at which the quantity of capital that can be increased for every unit of
decrease in the quantity of labor, holding the quantity of output constant.

Or

If both marginal products are positive, the slope of the isoquant is negative.

If we have diminishing marginal returns, we also have a diminishing marginal


rate of technical substitution - the marginal rate of technical substitution of labor
for capital diminishes as the quantity of labor increases, along an isoquant
isoquants are convex to the origin.

For many production functions, marginal products eventually become negative.


Why don't most graphs of Isoquants include the upwards-sloping portion?

Isoqua
nts

MPK
<0

Example:
Example: The
The Economic
Economic and
and
the
Uneconomic
Regions
the Uneconomic Regions ofof
Production
Production

Q=
20
Q=
10

MPL
<0
L

Q (K ) MU K (L) MU L

Q
MPK
K

MPL

L is held const

MPL
MRTS L , K
MPK

Q
L

K is held const

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