Marginal Rate of Substitution

# Marginal Rate of Substitution Assignment Help

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# Marginal Rate of Substitution

The concept of marginal rate of substitution occupies key place in the indifference curve analysis in the same way as the concept of marginal utility is the sole basis of the Marshalling utility analysis of consumer’s behavior. The term marginal rate of substitution means the rate at which a unit of, say a goods X is exchanged for another goods Y. the concept of marginal rate of substitution can be better understood  which shows various combinations or two goods X and Y that give equal satisfaction to the consumer.

 Movement from Combination No. of Unit of Given Up No. of Unit of X Gained MRSxy A to B B to C C to D D to E E to F 10 7 5 3 2 5 5 5 5 5 10/5 = 2.0 7/5 = 1.4 5/5 = 1.0 3/5 = 0.6 2/5 = 0.4

While combinations A, B, C, etc. of two goods X and Y give the same satisfaction to a consumer, any movement from combination A to B or B to C and so on involves sacrifice of some units of good Y to acquire an additional unit of good X. this number of units of good Y given up to get one unit of good X is called the marginal rate of substitution.

The marginal rate of substitution measures the quantity or number of units of one goods given up to get one extra of another goods so that the total satisfaction from this new bundle remains the same as of the previous bundle. Thus, the marginal rate of substitution of goods X for goods Y (MRSxy) shows the number of units of Y given up for one units of X with overall satisfaction remaining the same.

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