Why does the marginal rate of technical substitution mrts decline as we move rightward and downward along a convexshaped
isoquant

Question

Why does the marginal rate of technical substitution (MRTS) decline as we move rightward and downward along a convex-shaped isoquant?

Dr Kevin Butler · Answer

The marginal rate of technical substitution (MRTS) declines as we move rightward and downward along a convex-shaped isoquant due to the principle of diminishing marginal returns.

Here’s a more detailed explanation:

Definition of MRTS:
- The MRTS measures the rate at which one input can be reduced while increasing another input, keeping the output level constant. It is essentially the slope of the isoquant.
Convex Isoquant:
- A convex isoquant represents the efficiency of different combinations of two inputs in producing a certain level of output. The convex shape implies that as you substitute one input for another, the increase in one input is not a perfect substitute for the decrease in another.
Diminishing Marginal Returns:
- As you increase one input while decreasing the other, the productivity (or marginal product) of the increasing input diminishes. This is because initially, when you have a higher quantity of the input being reduced, each unit of the input being increased can more easily compensate for the reduction.
- However, as you continue this substitution, it becomes harder for additional units of the increasing input to maintain the same output level because their marginal productivity declines.
Decline in MRTS:
- This diminishing marginal productivity causes the MRTS to decline. For example, if you are producing output with labor and capital, initially, a small amount of labor can replace a large amount of capital. But as you keep substituting more labor for capital, each additional worker adds less to output than the one before, thus you need to add increasingly more labor to replace the same amount of capital.
- This declining MRTS reflects the economic reality that perfectly substituting one resource for another becomes less effective as the substitution progresses.

In summary, the decline in the MRTS as we move along a convex isoquant is due to the diminishing marginal returns of each input. As one continues substituting one input for another, it requires progressively more of the substituting input to compensate for reductions in the substituted input, hence the MRTS declines.

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