The marginal rate of technical substitution is the amount of capital that the manufacturer should refuse to use with an increase in labor costs per unit when old and new resources provide the same output.
Explanation:
The marginal rate of technical substitution (MRTS) shows the ratio of a change in one production factor to a change in another factor subject to low production. MRTS= ΔK/ ΔL is a formula, where ΔK is a capital change, ΔL is a labor change. The proportion shows the marginal rate of technical substitution of capital by labor, provided that the volume of production remains unchanged, that is, the production level is located on the same isoquant.
MRTS is closely related to the marginal products of production factors. If the amount of one of the elements is reduced, the volume of output will decrease. Therefore, it is necessary to increase the quantity of another factor for the production volume to remain unchanged. The isoquant has a convex shape, and, as it moves down the isoquant, the marginal rate of technical substitution tends to decrease (Fig.1). In segment AB, output volume does not change when two units of capital replace one unit of labor. Thus, in this case, the marginal rate of technical substitution of labor on capital is equal to two.
The economic meaning of the marginal rate of technical substitution is as follows: it expresses the relative value of labor in the manufacturing process, transferred in units of capital. The larger the MRTS, the higher the volume of money that one group of labor can replace in production, and the higher the relative value of labor. The main feature of the marginal rate of technical substitution is that it decreases with an increase in labor costs.