Question

How does diminishing marginal rate of substitution affect the shape of indifference curve?

Explain the concept of diminishing marginal rate of substitution and show how it affects the indifference curve.

Answer 1

1. Convexity to the origin is another characteristic of the indifference curve. The indifference curve is said to bow inward toward the origin if it is convex.
2. To put it another way, as we proceed down the indifference curve, its slope gets smaller. The premise of a declining marginal rate of substitution leads to this.
3. The analysis of the indifference curve is predicated on the idea that the marginal rate of substitution is decreasing.
4. This presumption suggests that a household will be less inclined to give up a unit of one item in order to receive an additional unit of the other commodity if the household consumes less of the first one.
5. We typically find that when a consumer has fewer resources, they are less ready to give up an item. He places greater value on a unit of the commodity whose quantity is declining.
6. Thus, the diagram’s IC increases as we proceed down the table and the indifference curve. As a result of the ‘A’ to ‘D’ combinations, the household is consuming more or less food.
7. The rate at which the consumer is willing to forgo more clothing in order to obtain more food decreases in accordance with the diminishing marginal rate of substitution assumption.
8. For instance, when the household goes from ‘A’ to ‘B,’ they are willing to give up three pieces of clothing for one unit of food; however, when they go from ‘B’ to‘C’, they are only willing to give up two units of clothing for one unit of food.
9. Because it represents the pace at which a consumer is willing to switch from one good to another, the slope of the indifference curve displays the marginal rate of substitution.
10. The indifference curve’s slope must be decreasing from left to right in order to be consistent with the diminishing marginal rate of substitution assumption. An indifference curve, in other words, needs to be convex to the origin.

Combination	Food (units)	Clothing (units)	Marginal Rate of Substitution
(1)	(2)	(3)	(4)
A	1	10	-
B	2	7	3 : 1
C	3	5	2 : 1
D	4	4	1 : 1