Suppose you’re writing a report for state legislators on the economic situation facing consumers. The state...

Suppose you’re writing a report for state legislators on the economic situation facing consumers. The state legislators would like the following questions answered so that they can better understand consumer behavior and the impact of potential policies on the state economy.

What is the relationship between the Diminishing Marginal Rate of Substitution and the Law of Diminishing Marginal Utility?

Solutions

Expert Solution

The marginal rate of substitution is the ratio at one particular point of comparison between the marginal utility of two goods.

MRSxy = MUx/MUy

Diminishing marginal utility is assumed when comparing MU of two goods which is why the MRS curve has a convex shape. the marginal rate of substitution is diminishing it means the ratio is changing as one moves along the convex shaped curve from one point to another. This reflects the fact that both goods being considered are in fact goods and that they are in some respect complements such that more of one without more of the other faces a diminishing return.

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Rahul Sunny answered 1 year ago

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