Marginal rate of substitution indicate _______.

rate of exchange of two goods by the consumer

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rate of production of two goods

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rate of marginal cost of two goods

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none of the above

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Solution

The correct option is A rate of exchange of two goods by the consumer
The marginal rate of substitution tells us the amount of a good the consumer has to give up in order to purchase more of the other good. The higher the opportunity cost of choosing the other product the more the consumer would have to give up to purchase the other good. This shows not only the value the individual has for a good but also the value of the good in the market.

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