Marginal rate of substitution, Microeconomics

The marginal rate of substitution (MRS) quantifies the quantity of one good a consumer will sacrifice to get more of the other good.

– It is calculated by the slope of the indifference curve.

292_marginal rate of substitution.png

We will now add a fourth assumption with respect to consumer preference:

    With an indifference curve there is a diminishing marginal rate of substitution.

Note the MRS for AB was 6, whereas that for DE was 2.

Marginal Rate of Substitution

Indifference curves are convex because more of one good is utilized, a consumer would prefer to sacrifice fewer units of a second good to obtain extra units of the first one.

Consumers select a balanced market basket

Perfect Substitutes and Perfect Complements

Two goods are perfect alternates when the marginal rate of substitution of one good for another is constant or stable.

607_marginal rate of substitution1.png

Two goods are complements when indifference curves for the goods are maintained as right angles.

977_marginal rate of substitution2.png

Posted Date: 7/24/2012 9:30:02 AM | Location : United States







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