question_answer

Explain the concept of Marginal Rate of Substitution (MRS) by giving an example. What happens to MRS when consumer moves downwards along the indifference curve? Give reasons for your answer.

Answer:

Marginal Rate of Substitution (MRS) refers to the rate at which a consumer is willing to substitute one good for each additional unit of the other good. Algebraically,
\[MRS=\frac{\Delta Y}{\Delta X}\]
It shows how many units of good Y the consumer is willing to sacrifice to gain one additional unit of good X.
The following schedule explains the concept of MRS
Consumption Combination	Units of good X	Units of good Y	\[MR{{S}_{XY}}\]
P	2	10	-
Q	3	5	5
R	4	2	3
S	5	1	1
As the consumer moves from consumption combination P to consumption combination Q, consumption of good X increases from 2 units to 3 units while, the consumption of good Y falls from 10 units to 5 units. That is to gain one additional unit of good X, the consumer sacrifices 5 units of good the consumer sacrifices 5 units of good K Thus, the MRS is 5.
The Indifference Curve depicting the above consumption combination is drawn as follows.
As we move down along the Indifference curve to the rights the Marginal Rate of Substitution falls. 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, as we move down along the Indifference Curve, the consumer is willing to sacrifice less and less for each additional unit of the other good consumed. Initially, at point Q the consumer has 2 units of good X and 10 units of good Y. As the consumer moves from point P to point Q, he is willing to sacrifice 5 units of good Y for one additional unit of good X. As compared to this, at point R the consumer has 4 units of good X and only 2 units of good Y. Now, as the consumer has 4 units of good X and only 2 units of good Y. Now, as the consumer moves from R to 5, he is willing to sacrifice only one unit of good Y for one additional unit of good X Thus, as the consumer moves down along the IC, he has more of good X and to consume one additional unit of good X he is willing to sacrifice lesser and lesser units of good Y.