... into further explanations, there are a number of assumptions to be made. Firstly, we assume that we are in a two-factor world, i.e. L (labour) and K (capital). The production function is therefore Q = f (K, L). Secondly, these inputs are hired in perfectly competitive markets so that firms can sell or buy them at the prevailing rental rates. MRTS refers to the technical relationship between input and output. It can be shown by an isoquant, which indicates the different combination of the factors that produce the same output. MRTS is equal to change in K/change in L (?K/?L). It could also be an isoquant map that shows different level of Q. The following isoquant map (diagram 1) gives us information about the dolls production in a toy factory. The isoquant Q1 produces 500 dolls, Q2 produces 600 dolls, and Q3 produces 700 dolls. A firm expands its production by ...

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