6.12 : Marginal Rate of Technical Substitution II

MRTS is the rate at which one input can be reduced for a unit increase in another input, keeping output constant. Mathematically, it's expressed as the negative ratio of the marginal products of the two inputs. It's essential for maintaining efficiency in the production process.

Imagine a construction company building houses. Initially, they used ten workers and five machines to construct a house within a month. If the marginal product of labor is twice that of machines, the MRTS between labor and machines is 2:1. This means if a machine is temporarily unavailable, the company could employ two additional workers to fill the gap, ensuring the house is still completed on time. However, this ratio isn't fixed along the isoquant due to diminishing returns. MRTS helps firms find the least-cost combination of inputs for a given output level.

Nonetheless, advancements in technology can modify this balance. A new, more efficient machine might reduce the number of workers needed, altering the MRTS. Understanding MRTS helps companies to make informed decisions about resource allocation and production techniques.