Suppose that a consumer's marginal rate of substitution at her current chosen bundle is MUx/MUy=3 but she can exchange X and Y at Px/Py=5. Should she keep her current bundle, or can she make herself better off by trading at these prices? Which good will she buy, and which will she sell?
Suppose that a consumer's marginal rate of substitution at her current chosen bundle is MUx/MUy=3 but she can exchange X and Y at Px/Py=5. Should she keep her current bundle, or can she make herself better off by trading at these prices? Which good will she buy, and which will she sell?
The marginal rate of substitution (MRS) is the slope of the indifference curve (in the question is the modulus of the slope of the indifference curve, since indifference curve is negatively sloped). It states the maximum number of units of good Y, the consumer is willing to give up for one unit of Y. Here MRS=3 means the consumer can trade 3 units of good Y for one unit of good X. Or in order to give up one unit of good X, the consumer demands at least 3 units of good Y.
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