Week 1 - MRS Flashcards
What is the Marginal Rate of Substitution (MRS) in economics?
The Marginal Rate of Substitution (MRS) measures the rate at which a consumer is willing to trade or exchange one good (Y) for another good (X) while remaining indifferent, holding utility constant.
How is the MRS defined mathematically?
What does a negative MRS indicate?
A negative MRS indicates that the consumer is willing to give up some units of good X to receive more units of good Y, reflecting the typical trade-off in preferences.
How is MRS related to indifference curves?
The MRS measures the slope of the indifference curve, which shows all combinations of goods that provide the same level of utility or satisfaction to the consumer.
What does a higher MRS indicate?
A higher MRS indicates that the consumer values good Y relatively more compared to good X, and is therefore willing to trade more units of X for fewer units of Y.
What is the formula for calculating MRS given utility functions?
Why is MRS important in consumer theory?
MRS is crucial in understanding how consumers make trade-offs between goods, which helps in predicting consumer behavior and analyzing the impact of price changes on consumption patterns.
How does MRS change along an indifference curve?
MRS decreases along an indifference curve as the consumer consumes more of a good. This reflects diminishing marginal utility and the decreasing rate at which the consumer is willing to trade goods to maintain utility.
How is Marginal Rate of Substitution (MRS) related to exchange rates in economics?
MRS can be thought of as an exchange rate between two goods. If a consumer gives up ∆x units of good 1, they can obtain E∆x units of good 2, where E is the exchange rate. Therefore, the slope of the exchange relationship is -E.
What does Marginal Rate of Substitution (MRS) represent?
MRS represents the rate at which a consumer is willing to substitute one good for another while maintaining the same level of satisfaction.
How is MRS interpreted as the marginal willingness to pay?
MRS indicates how much of one good (the second good) a consumer is willing to give up to obtain an additional unit of another good (the first good), assuming all other goods are held constant.
What does MRS indicate for perfect substitutes?
For perfect substitutes, MRS is constant because the consumer is indifferent between trading one unit of the first good for a fixed number of units of the second good.
What does MRS indicate for perfect complements?
For perfect complements, MRS can be either zero or infinite. It is zero when the goods are consumed in fixed proportions, and infinite when the consumer requires one good in exact proportion to the other.
How does MRS behave on indifference curves that are strictly convex?
On strictly convex indifference curves, MRS diminishes in absolute value as the consumer moves along the curve from left to right. This reflects the decreasing rate at which the consumer is willing to trade one good for another as they consume more of one good.
What happens to MRS as the consumer consumes more of one good?
As the consumer acquires more of one good, they become more willing to give up some of it to obtain more of the other good. Thus, MRS tends to decrease (in absolute value) with increasing consumption of one good.
