The marginal rate of transformation where goods X and Y are produced by an economy using capital and labor as inputs equals A) X/Y. B) w/r, where w is the wage and r is the rental rate of capital. C) MP_L/MP_K, where L stands for labor and K stands for capital. D) MC_X/MC_Y

Question

Quizplus · Accepted Answer

The marginal rate of transformation (MRT) represents the amount of one good that must be given up in order to produce one additional unit of the other good while keeping the level of production constant. Therefore, the MRT can be calculated as the ratio of the marginal cost of producing one good to the marginal cost of producing the other good. In this case, the MRT of X for Y (the amount of Y that must be given up to produce one more unit of X) is equal to the marginal cost of producing X divided by the marginal cost of producing Y. The marginal cost of producing X is MC_X, and the marginal cost of producing Y is MC_Y, so the MRT can be expressed as MC_X/MC_Y. Choice D is therefore the best choice. The other options are not equivalent to the MRT.

The Marginal Rate of Transformation Where Goods X and Y