Posted by Anjali Kaur on Jul 20, 2020

What is the Marginal Rate of Substitution?

The marginal rate of substitution refers to the rate at which the consumer substitutes one good, to obtain one more unit of the other good. Today, we will understand the concept of the marginal rate of substitution (MRS) in an easy manner. Let’s Learn.

Features of Marginal rate of Substitution

• It is the slope of the indifference curve.
• The formula of MRS =  ∆Y/ ∆X.
• In short, The Marginal Rate of Substitution of Good X for Good Y (MRSxy) = ∆Y/ ∆X (which is just the slope of the indifference curve)
• MRS is never constant, it changes over the indifference curve. (Not true always)
• Moving along the indifference curve, MRS keeps falling. This is termed as a diminishing marginal rate of substitution.

How is Marginal rate of substitution calculated?

Consider the following combination of two goods, that a consumer will consume. We will construct an indifference curve using this table. An indifference curve is a curve that shows combination of two goods that a consumer will consume and will get the same level of satisfaction.

Good X	Good Y	∆X(X2-X1)	∆Y (Y2-Y1)	MRS = ∆Y/ ∆X
10	60	–	–	–
20	40	10	20	2
30	30	10	10	1
40	21	10	9	0.9
50	13	10	7	0.7
60	10	10	3	0.3

As you can see from the table and the indifference curve is drawn below. As the consumer moves from point A to B, MRS(Between A and B)= 2. From B to C, MRS decreases and becomes 1. Similarly, moving along the indifference curve, the consumer is showing lesser and lesser willingness to give up the consumption of Good Y, to gain 10 additional units of Good X. This is the reason, that along the convex-shaped indifference curve, MRS keeps falling, and the consumer faces a diminishing marginal rate of substitution moving along the indifference curve.

Test yourself

Question 1. The MRS of 3 means that, from the consumer’s point of view, 1 more unit of _______ is as good as 3 more units of _______. Select one option from the given choices with proper reasoning.

a. Good X, Good Y

b. Good Y, Good X2.

Question 2. A marginal rate of substitution of _____ means that, from the consumer’s point of view, 15 more unit of Good Y is as good as 10 more units of Good X. Select one option with proper calculation.

a. 2/3

b. 1

c. 1.5

d. 15

I know you want to confirm your solutions. Solve these questions on a plain white sheet, using a black pen. Send it to me, with your name, class, school/college you are from. I will give you a solution credit by mentioning your name on my website. Drop an email at Contact@LearnWithAnjali.com

Photo by Debby Hudson on Unsplash

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