Question

Explain marginal rate of substitution between two goods.

Answer 1

Marginal rate of substitution (MRS) is the rate at which the consumer is willing to substitute one good for another without changing the level of satisfaction.

Marginal rate of substitution of X for Y (MRSxy) is defined as the amount of Y the consumer is willing to give up to get one additional unit of X so that the same level of satisfaction is maintained. Marginal rate of substitution of food for clothing is illustrated in Col. 4 of Table 3.6. For example, when the consumer moves from combination 'A' to combination 'B', he is willing to give up 3 units of clothing for 1 unit of food, i.e., MRS of food for clothing is 1 : 3.

In the same way, when we substitute 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 consumer is willing to give up to get one additional unit of Y, while maintaining the same level of satisfaction.