The marginal rate of technical substitution of labor for capital is defined as:
A)The rate at which the quantity of capital can be decreased for every one unit increase in the quantity of labor, holding the quantity of output constant
B)The rate at which the quantity of capital must be increased for every one unit decrease in the quantity of labor, holding the cost of output constant.
C)The rate at which the cost of labor and capital increases as output rises.
D)The rate at which output rises as capital increases, holding labor constant.

Question

Quizplus · Accepted Answer

The marginal rate of technical substitution of labor for capital is the rate at which the quantity of capital can be decreased for every one unit increase in the quantity of labor, holding the quantity of output constant. It represents the rate at which a firm can substitute labor for capital without affecting the level of output. The marginal rate of technical substitution of labor for capital is the rate at which a firm can technically substitute one input (labor) for another input (capital) while keeping the same level of output constant. Therefore, option A is the correct definition. Option B describes the inverse, where the firm is increasing capital to compensate for a decrease in labor, and option C describes the cost of production increasing with output, not the rate of substitution between inputs. Option D describes the marginal product of capital, which is a different concept.

The Marginal Rate of Technical Substitution of Labor for Capital