Answer to Question #186680 in Microeconomics for Bornface Kandunda

Question

b) What is the marginal rate of technical substitution (MRTS)? Simplify fully [13 marks] Does the above function exhibit increasing, decreasing or constant returns to scale? Illustrate why and explain what this means

Answer 1

b) marginal rate of technical substitution is a theory that states the rate at which one factor has to reduce to maintain the same level of productivity when another factor is raised.

MRTs mutually benefit between it's factors. For example capital and labor which allows a firm to maintain a constant output.

MRTs( L,K) = -∆K/∆L = MPL/MPK

Where K = capital

L= labour

Mp= marginal products for the inputs

∆k/∆l = amount of capital that can be lowered when labour ia raised.

The slope of the MRTs on the graph shows the rate at which a given input can be substituted for the other while keeping the same output level.