14 Explain marginal rate of technical substitution and the c

14. Explain marginal rate of technical substitution and the choice between two factors of production. (Mach Ch. 10)

Solution

The marginal rate of technical substitution is given by the slope of the isoquant and given by the ratio of marginal products of labour and capital respectively. The marginal rate of technical substitution will be declining as we move down an isoquant. Its shows the degree of trade off between the two factors of production. Thus if we have labour on the horizontal axis and capital on the vertical axis, then as we employ more labour then the marginal product of labour decline and as we employ less capital then the marginal product of capital rises. Thus as we move along the horizontal axis as MPL falls and MPK rises the marginal rate of technical substitution declines as we move down the isoquant thus we will give away less capital to obtain an additional unit of labour.