Question

Define marginal rate of substitution.

Hint:

MRS shows the trade-off between two goods. It generally diminishes as more of one good is consumed.

Answer 1

Step 1: Defining Marginal Rate of Substitution (MRS):
The Marginal Rate of Substitution (MRS) refers to the rate at which a consumer is willing to substitute one good for another, keeping the level of utility constant. It is the amount of one good that a consumer is willing to give up in exchange for one additional unit of another good, without changing their overall satisfaction or utility.
Step 2: Formula for MRS:
Mathematically, the MRS can be expressed as: \[ \text{MRS} = \frac{\Delta Y}{\Delta X} \] Where \(\Delta Y\) is the change in the quantity of good Y, and \(\Delta X\) is the change in the quantity of good X. This represents the trade-off between the two goods.
Step 3: Conceptual Meaning of MRS:
- Diminishing MRS: In most cases, the MRS diminishes as the consumer substitutes one good for another. This reflects the law of diminishing marginal utility, where the consumer becomes less willing to substitute one good for another as they have more of one good and less of the other.
Step 4: Final Conclusion:
The Marginal Rate of Substitution is the ratio of the marginal utility of one good to the marginal utility of another good, representing the rate at which a consumer is willing to exchange one good for another while maintaining the same level of satisfaction.