Explain the meaning of diminishing marginal rate of substitution with the help of a numerical example.
Explain the meaning of diminishing marginal rate of substitution with the help of a numerical example.
Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substiute good 1 for good 2. It is determined by ΔGood 2ΔGood 1 at any point on IC.
Diminishing MRS implies that for every additional unit of good 1, the consumer is willing to give up less and less amount of good 2. So, ΔGood 2ΔGood 1 tends to decline as we move along the IC curve from the left to the right. This happens due to the law of diminishing marginal utility. It is because of the diminishing MRS that the indifference curve is convex to the origin.
Example:
CombinationApplesOrangesMRSA110−B273:1C352:1D441:1
The given table indicates that the consumer is willing to give up 3 oranges for getting the second apple, 2 oranges for getting the third apple and 1 orange for getting the fourth apple. It is because of the diminishing MRS that the IC becomes convex to the origin.
Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substiute good 1 for good 2. It is determined by ΔGood 2ΔGood 1 at any point on IC.
Diminishing MRS implies that for every additional unit of good 1, the consumer is willing to give up less and less amount of good 2. So, ΔGood 2ΔGood 1 tends to decline as we move along the IC curve from the left to the right. This happens due to the law of diminishing marginal utility. It is because of the diminishing MRS that the indifference curve is convex to the origin.
Example:
CombinationApplesOrangesMRSA110−B273:1C352:1D441:1
The given table indicates that the consumer is willing to give up 3 oranges for getting the second apple, 2 oranges for getting the third apple and 1 orange for getting the fourth apple. It is because of the diminishing MRS that the IC becomes convex to the origin.
