TOPIC 2: THE MARGINAL RATE OF SUBSTITUTION
THE MARGINAL RATE OF SUBSTITUTION
The marginal rate of substitution (MRS) is the value of a unit of good x measured in
units of good y; that is, it is the maximum quantity of good y a consumer is willing to
give up in order to get an additional unit of good x, or alternatively, it is the number of
units of good y needed to compensate the consumer from losing one unit of good x.
The value MRS(x,y) is not generally constant, but depends on the relative scarcity of
each good in the bundle
(x,y).
We define the MRS(x,y) as the quantity of good y needed to compensate the
consumer from a loss of one infinitesimal unit of good x, so that the consumer
maintains the level of welfare he has with the bundle (x,y). That is, the MRS(x,y) is
the value to the consumer of an infinitesimal unit of good x, given in units of good y,
when the consumer’s bundle is (x,y).
The MRS(x,y) is the absolute value of the slope of the line tangent to the indiference
curve at (x,y).
1st method to calculate the MRS
1- Solve for y
