This preview shows page 1. Sign up to view the full content.
Unformatted text preview: lope of the isoquant. We should also remember from ECON 201 that the MRTS is the ratio of the two marginal products. MRTS = MPK / MPL Marginal Rate of Transformation The marginal rate of transformation (MRT) refers to the rate that one good can be substituted for another good in the production process of an economy without changing the production technology and resources of the economy. Essentially, MRT measures the trade-off between one good and another along the same PPF (production possibility frontier). Recall from ECON 201 that a PPF refers to all possible combinations of goods that can be produced efficiently with given levels of factor inputs and production technology. Figure #4: Production Possibility Frontier
Jalapeno Chips Bubble Gum 19 A simple example is the trade-off between Chips and Gum. With fixed levels of factor inputs and production technology, the economy can either produce more gum and less chips OR more chips and less gum, NOT BOTH. To produce more gum, capital and labour must be moved from the chip sector to the gum sector, and hence less chips will be produced. So, we can see that MRT differs from MRS and MRTS mainly in the type of commodities being substituted. MRT vs. MRS MRS refers to the consumption side while MRT refers to the production side. MRS measures the substitution of outputs consumed while MRT measures the substitution of outputs produced. MRT vs. MRTS MRTS refers to the input side while MRT refers to the output side. MRTS measures the substitution of factor inputs while MRT measures the substitution of outputs produced. Similar to the relationship between MRS and an indifference curve, the MRT is defined as the (negative) slope of the PPF. MRT is the rate at which one good can be substituted for another good along the same production possibility frontier. MRT = -Chips (along the same PPF or holding factors and technology constant) Gum We can also show that the MRT is the ratio of the two marginal costs. MRT = MCGum / MCChips Take the simple case of a single factor input (say, labour) which is used to produce the two outputs, Chips a...
View Full Document
- Spring '10