Marginal rate of substitution

MEANING

The marginal rate of substitution or MRS is the rate of exchange between some units of goods X and Y which are equally preferred.  The MRS of X for Y (MRSxy), is the amount of Y that will be given up for obtaining each additional unit of X.

According to Prof.  Bilas, " The MRS of X for Y is defined as the amount of Y the consumer is just willing to give up to get one more unit of X and maintain the same level of satisfaction. "

EXPLANATION

This can be explained with the help of the table and diagram below.

**draw the table

In the above table,  we can see that, to have the 2ND combination and yet to be at the same level of satisfaction,the consumer is prepared to forego 5 units of Y for obtaining an extra unit of X.  The MRS of X for Y is 5:1. Similarly to have the 3rd combination he is prepared to forego 4 units of Y for obtaining an extra unit of X and so on.

As the consumer proceeds to have additional units of X,  he is willing to give away less and less units of Y so that MRS falls from 5:1 to 1:1 in the 6TH combination. This behaviour of consumer is known as the Principle of DIMINISHING MRS.

We have,
      MRSxy=change in good Y /  change in good X

**draw the diagram.
In the above figure, at point M on the IC curve I the consumer is willing to give up 5 units of Y to get an additional unit of X. As he moves forward along the curve from M to R,  he acquires more of X and less of Y.  The amount of Y he is prepared to give up to get additional units of X becomes smaller and smaller because of principle of Diminishing MRS.

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