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The marginal rate of technical substitution is a. the rate at which the firm can substitute...

The marginal rate of technical substitution is

a. the rate at which the firm can substitute labor for capital while holding total cost constant.

b. the rate at which the firm can substitute labor for capital while holding output constant.

c. the slope of the isocost curve.

d. both a and c

e. none of the above

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Answer #1

Answer : Option b) the rate at which the firm can substitute labor for capital while holding output constant

The marginal rate of technical substitution represents the slope of the isoquant curve. An isoquant in this case represents different combinations of labor or capital that can be used to achieve the same given level of output. Now when one factor is increased, the usage of other factor needs to be given up in order to stay in the given isoquant curve. By how much that substitution is to be done is represented by marginal rate of technical substitution.

Thus basically the marginal rate of technical substitution is the rate at which the firm can substitute labor for capital while holding output constant (that is staying on the same isoquant curve).

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