Question

Define marginal rate of substitution. Explain its behaviour along an indifference curve.

Answer 1

The marginal rate of substitution between good 2 and good 1 can be defined as the amount of good 2 that the consumer is ready to forego or substitute for an additional unit of good 1. In other words, it represents the cost of good 1 that the consumer is ready to pay in terms of good 2.
Algebraically, it is represented as follows
\[\left| \frac{∆ x_2}{∆ x_1} \right|\]
The MRS is diminishing in nature such that it keeps declining along the indifference curve. If a consumer prefers a consumption bundle that has comparatively more of good 1 and less of good 2, then according to the diminishing rate of substitution, the amount of good 2 a consumer is ready to give up for an additional unit of good 1 declines or diminishes with successive increase in the amount of good 1. In other words, if the consumer consumes more and more of good 1, then his/her willingness to sacrifice good 2 for additional units of good 1 will go on diminishing i.e. as the amount of good 1 increases, the rate of substitution between good 1 and good 2 falls.