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Explain the meaning of diminshing marginal rate of substitution with the help of a numercial example |
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Answer» Solution :Marginal Rate of Substitution (MRS) refers to the rate at which a CONSUMER is willing to substitute one good for each additional unit of other good. Algebraically. `MRS = (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  As the consuer 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 to good X, the consumer sacrifices 5 units of good Y. Thus, the MRS is 5 |
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