Marginal Rate of Technical Substitution
Definition of 'Marginal Rate of Technical Substitution'
The MRTS is calculated by dividing the marginal product of one input by the marginal product of another input. For example, if a firm is producing widgets and the marginal product of labor is 2 widgets per hour and the marginal product of capital is 1 widget per hour, then the MRTS is 2. This means that the firm is willing to give up 1 unit of capital in order to get 2 units of labor.
The MRTS is an important concept in economics because it can be used to analyze the efficiency of production. A firm is said to be operating efficiently when it is producing at the point where the MRTS is equal to the ratio of the prices of the inputs. This is because at this point, the firm is getting the most output for the least input.
The MRTS can also be used to analyze the impact of changes in input prices on production. For example, if the price of labor increases, then the MRTS will decrease. This means that the firm will be willing to give up less capital in order to get one more unit of labor. This will lead to a decrease in output.
The MRTS is a complex concept, but it is an important one for understanding the relationship between inputs and outputs in a production function. It can be used to analyze the efficiency of production and the impact of changes in input prices on production.
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