The amount of good 2 a consumer is willing to give up for an extra unit of good one. This phenomenon is called ________.

Negative rate of substitution

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Increasing rate of substitution

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Constant rate of substitution

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Diminishing rate of substitution

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Solution

The correct option is D Diminishing rate of substitution
Diminishing rate of substitution is another term used for marginal rate of substitution. Marginal rate of substitution is the rate at which consumer will give up a quantity of goods for the exchange of another good. The formula for calculating the marginal rate of substitution is change in product 'x' divided by change in product 'y'. Calculating the marginal rate of substitution will the give the slope of the indifference curve.

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