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Question
Answer the following question.
Discuss briefly, using a hypothetical schedule the concept of diminishing marginal rate of substitution.
Solution
The marginal rate of substitution refers to the rate at which a consumer is willing to substitute one good for each additional unit of the other good.
As we move down along the Indifference curve to the right, the slope of IC (MRS) decreases. This is because as the consumer consumes more and more of one good, the marginal utility of the good falls. On the other hand, the marginal utility of the good which is sacrificed rises. In other words, the consumer is willing to sacrifice less and less for each additional unit of the other good consumed. Thus, as we move down the IC, MRS diminishes.
| Good X | Good Y | MRS of X for Y |
| 1 | 12 | – |
| 2 | 8 | 4: 1 |
| 3 | 5 | 3: 1 |
| 4 | 3 | 2: 1 |
| 5 | 2 | 1: 1 |
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