Final answer:
The marginal rate of technical substitution diminishes with more labor substituted for capital because the marginal product of labor decreases, and the marginal product of capital potentially increases, as more labor is added to fixed capital, resulting in a declining MRTS (option 4).
Step-by-step explanation:
To explain why the marginal rate of technical substitution (MRTS) is likely to diminish as more and more labor is substituted for capital, we can look at the concept of marginal product (MP) of labor. Initially, as labor is added to a fixed amount of capital, the marginal product of labor may increase because additional workers can use the fixed capital more efficiently, as seen in the example of a two-person saw operating better with two workers than one. However, as even more labor is added, the marginal product of labor starts to decline due to the fixed amount of capital (the Law of Diminishing Marginal Product). Because MRTS is essentially the ratio of the marginal product of labor to the marginal product of capital (MRTS = MPL/MPK), as MPL starts to decrease with the addition of more labor (and MPK potentially increases since capital is now less abundantly used), the MRTS decreases. Therefore, option 4) is the correct explanation: 'The substitution of labor for capital decreases the MP Subscript Upper L and increases the MP Subscript Upper K. Since the MRTS is the ratio of the former to the latter, it will diminish as this substitution occurs.'