Why an MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction?

Why an MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction?

6. Explain why an MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction. The MRS describes the rate at which the consumer is willing to trade off one good for another to maintain the same level of satisfaction.

Why must MRS be equal to the ratio of prices of two goods?

In other words, the MRS (the slope of the indifference curve) must be equal to the price ratio (the slope of the budget line). The reason is that otherwise the consumer could reach a higher indifference curve within the same budget set by altering the chosen bundle.

What is the marginal rate of substitution equal to?

The marginal rate of substitution is the slope of the indifference curve at any given point along the curve and displays a frontier of utility for each combination of “good X” and “good Y.”

Why does MRS decrease?

Well MRS decline continuously in IC curve because of law of diminishing marginal utility. Means when the consumer consumes more and more of good 1 then his marginal utility from another good keeps on declining and he is willing to give up less and less of good 2 for each good 1. Thats why MRS decline in IC curve.

Are the reason for the diminishing marginal rate of substitution?

An important principle of economic theory is that marginal rate of substitution of X for Y diminishes as more and more of good X is substituted for good Y. In other words, as the consumer has more and more of good X, he is prepared to forego less and less of good Y.

Why should MRS diminish for a stable consumer’s equilibrium?

Diminishing marginal utility clearly states that if the consumption increases, the utility derived from the additional units goes on decreasing. So, MRS should be diminishing as additional consumption of A results in a fall in marginal utility due to that the consumer will not be willing to increase its consumption.

When a consumer consumes two goods to reach equilibrium MRS must be equal to ratio of prices?

Yes, we agree with the statement that “For a consumer to be in the equilibrium position, the marginal rate of substitution between the two goods must be equal to the ratio of prices of the two goods”. A consumer always aims at maximising his/her utility or satisfaction level.

Why should MRS decline?

What is marginal rate of substitution between two commodities?

The marginal rate of substitution (MRS) is the rate at which a consumer would be willing to forgo a specific quantity of one good for more units of another good at the same utility level.

What is the importance of marginal rate of substitution to a consumer?

The marginal rate of substitution (MRS) determines whether or not a consumer would replace one product or service for another one, assuming the two goods offer the same level of satisfaction and utility.

What will happen if MRSxy PX PY?

if MRS > Px/Py, the consumer will consume more x and less y. If MRS < Px/Py, the consumer will consume less x and more y. If MRS = Px/Py, the consumer will not change their consumption. As Point A, MRS is greater than Px/Py, so José should consume more x and less y to maximize his utility.