Question

What is elasticity of substitution ?

Answer 1

Elasticity of Substitution- It is a measure of how the inputs ratio change with respect to the changes in the Marginal Rate of substitution.

Marginal Rate of substitution is the ratio of marginal product of labor to marginal product of capital.

Formula to calculate elasticity of substitution is as follows:-

$σ = ([∆(K/L) ]/∆MRTS)* (MRTS)/(K/L)$

Where, MRTS = MPL/MPK