Explain the concept of 'Marginal Rate of Substitution' with the help of a numerical example. Describe its behaviour along an indifference curve.
Explain the concept of 'Marginal Rate of Substitution' with the help of a numerical example. Describe its behaviour along an indifference curve.
Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute good 1 for good 2, i.e. it is the rate at which a consumer is willing to give up good 2 for a unit more of good 1.
It is determined by ΔGood 2ΔGood 1 at any point on IC.
The concept of MRS is explained with the help of given table.
CombinationApplesOrangesMRSA110−B273:1C352:1D441:1
The above table indicates that the consumer will give up 3 oranges for getting the second apple, 2 oranges for getting the third apple and 1 orange for getting the fourth apple. In other words, marginal rate of substitution of apples for oranges is diminishing. It is because of the diminishing MRS that the IC becomes convex to the origin.
Now, we know that marginal rate of substitution of X for Y (MRSXY) is defined as the amount of Y the consumer is willing to forego for one more unit of X.
Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute good 1 for good 2, i.e. it is the rate at which a consumer is willing to give up good 2 for a unit more of good 1.
It is determined by ΔGood 2ΔGood 1 at any point on IC.
The concept of MRS is explained with the help of given table.
CombinationApplesOrangesMRSA110−B273:1C352:1D441:1
The above table indicates that the consumer will give up 3 oranges for getting the second apple, 2 oranges for getting the third apple and 1 orange for getting the fourth apple. In other words, marginal rate of substitution of apples for oranges is diminishing. It is because of the diminishing MRS that the IC becomes convex to the origin.
Now, we know that marginal rate of substitution of X for Y (MRSXY) is defined as the amount of Y the consumer is willing to forego for one more unit of X.
