Question

Explain the concepts of marginal rate of substitution and with the help of numerical examples.

Answer 1

MRS is the quantity of one good a consumer is willing to give up to gain an additional unit of another good while keeping satisfaction unchanged. For example, if the consumer gives up 4 units of Y for 1 additional unit of X: 

\[ \mathrm{MRS}_{XY}=\left|\frac{\Delta Y}{\Delta X}\right|=\frac{4}{1}=4 \]