Explain the concept of marginal rate of substitution. Explain the reac

1.	Explain the concept of marginal rate of substitution. Explain the reaction of the consumer when marginal rate of substitution is higher than the ration of prices.i.e., MRS>Px/Py
Answer» Marginal Rate of Substitution of X for Y refers to the number of units of good Y that the consumer is willing to forego for an additional unit of good X, so as to maintain the same level of satisfaction. MRS=∆/∆X As the given consumer moves downwards along the indifference curve, we observe that MRS(the slope of the indifference curve) continuously declines. This implies that the indifference curve is convex. According to question, when MRS>Px/Py, This means to get one more unit of commodity X consumer is willing to sacrifice more units of commodity, Y than the market requires. Consumer will now buy more of commodity and buy less of commodity Y. This will bring down MRS till it becomes equal to Px/Py and the equilibrium is achieved.

Explain the concept of marginal rate of substitution. Explain the reaction of the consumer when marginal rate of substitution is higher than the ration of prices.i.e., MRS>Px/Py

Answer»

Marginal Rate of Substitution of X for Y refers to the number of units of good Y that the consumer is willing to forego for an additional unit of good X, so as to maintain the same level of satisfaction.

MRS=∆/∆X

As the given consumer moves downwards along the indifference curve, we observe that MRS(the slope of the indifference curve) continuously declines. This implies that the indifference curve is convex.

According to question, when MRS>Px/Py,

This means to get one more unit of commodity X consumer is willing to sacrifice more units of commodity, Y than the market requires. Consumer will now buy more of commodity and buy less of commodity Y. This will bring down MRS till it becomes equal to Px/Py and the equilibrium is achieved.

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