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In: Economics

assumption of diminishing marginal rate of substitution means that

assumption of diminishing marginal rate of substitution means that

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Expert Solution

Marginal Rate of Substitution is the rate at which a consumer is willing to sacrifice one good for an additional unit of the other good.

- If a consumer has a good in abundance and the other good in scarce, he will be willing to give up more units of the abundant good to consume one additional unit of the scarce good since it would not make much of a difference to him if he sacrifices greater number of the abundant good.

- However, as the number of the abundant good starts reducing, the consumer becomes less willing to sacrifice huge amounts of this good for an additional unit of the 'earlier' scarce good. This is because the consumer has a lower quantity of the earlier abundant good and is unwilling to sacrifice huge amounts of it.

- This concept of a decline in willingness to sacrifice higher and higher amounts of one good for an additional unit of the other good is the 'diminishing marginal rate of substitution'.

As a good becomes scarce, the consumer becomes less willing to give up high amounts of that good for the consumption of an additional unit of another good.

Rahul Sunny answered 2 years ago
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