Marginal Rate of Substitution

 

Marginal Rate of Substitution:

Marginal Rate of Substitution (MRS) is the rate at which the consumer is prepared to exchange goods X and Y Consider Table-2. In the beginning the consumer is consuming 1 unit of food and 12 units of clothing. Subsequently, he gives up 6 units of clothing to get an extra unit of food, his level of satisfaction remaining the same. The MRS here is 6. Like wise which he moves from B to C and from C to D in his indifference schedule, the MRS are 2 and 1 respectively. Thus, we can define MRS of X for Y as the amount of Y whose loss can just be compensated by a unit gain of X in such a manner that the level of satisfaction remains the same. We notice that MRS is falling i.e., as the consumer has more and more units of food, he is prepared to give up less and less units of cloths. There are two reasons for this.

1. The want for a particular good is satiable so that when a consumer has its more quantity, his intensity of want for it decreases. Thus, when consumer in our example, has more units of food, his intensity of desire for additional units of food decreases.

2. Most of the goods are imperfect substitutes of one another. If, they could substitute one another perfectly. MRS would remain constant

 

 

 

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