Advertisements
Advertisements
Question
Explain the marginal rate of substitution between two goods.
Advertisements
Solution
The marginal rate of substitution (MRS) is the rate at which a consumer is prepared to substitute one good for another while maintaining their level of satisfaction.
The marginal rate of substitution of X for Y (MRSxy) is defined as the amount of Y that a consumer is prepared to give up in exchange for one more unit of X while maintaining the same level of satisfaction. The marginal rate of substituting food for clothing is shown in the table.
| 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 |
For example, when a consumer switches from combination 'A' to combination ‘B’, he is willing to trade three units of clothes for one unit of food, i.e., the MRS of food for clothing is 1:3.
Similarly, when substituting Y for X, we express it as MRSvx. The marginal rate of substitution of Y for X is defined as the amount of X the customer is prepared to give up to receive one more unit of Y while keeping the same level of satisfaction.
