Explain the meaning of diminishing marginal rate of substitution with the help of an example.
Explain with the help of a numerical example, the meaning of diminishing the marginal rate of substitution
A diminishing marginal rate of substitution:-
The marginal rate of substitution means the rate at which the consumer is willing to substitute one commodity for the other commodity. MRS falls because of the law of diminishing the marginal utility.
Law of diminishing marginal utility means that as more units of a good are consumed, the marginal utility received from the consumption of every additional unit of the good declines.
|Total Utility (TU)
Marginal Utility (MU)
MUn = TUn − TUn-1
|1||50||50 − 0 = 50|
|2||80||80 − 50 = 30|
|3||100||100 − 80 = 20|
|4||110||110 − 100 = 10|
|5||110||110 − 110 = 0|
|6||105||105 − 110 = −5|
In the given schedule, the marginal utility of the second unit is 30 utils and it decreases to 20 and 10 for the consumption of the 3rd and 4th unit of the marginal utility, respectively. It becomes zero for the consumption of the 5th unit, and it becomes negative for the 6th unit. Hence, the marginal utility will decrease with additional units of consumption.