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Worked Examples · Example 4
Q.

A consumer is indifferent between the following combinations of goods X and Y — that is, all of them lie on the same indifference curve. Compute the Marginal Rate of Substitution (MRSxyMRS_{xy}) between each successive pair of combinations, and state whether the Law of Diminishing MRS holds.

CombinationUnits of XUnits of Y
A112
B28
C35
D43
E52
Tamil Nadu DgeTextbookSubjectiveImportance★★★★★
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The Marginal Rate of Substitution between two adjacent combinations on the same indifference curve is the amount of Y given up divided by the amount of X gained, taken as a positive value: MRSxy=−ΔYΔXMRS_{xy}=-\dfrac{\Delta Y}{\Delta X}.

MoveΔXΔYMRSxy = −ΔY/ΔX
A → B+1−44
B → C+1−33
C → D+1−22
D → E+1−11

The MRS falls steadily — 4, then 3, then 2, then 1 — as the consumer moves down the indifference curve acquiring more X. This is exactly what the Law of Diminishing Marginal Rate of Substitution predicts: as the consumer already holds more units of X, each additional unit of X becomes relatively less valuable to him compared with the Y he still holds, so he is willing to sacrifice progressively SMALLER amounts of Y to obtain one more unit of X. This is …

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