Q.Explain the law of diminishing marginal rate of substitution in indifference curves, with the help of diagram.
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Start your 14-day free trial to unlock the full solution →As a consumer takes more of X for Y at constant satisfaction, the units of Y he will sacrifice for each extra unit of X keep falling (MRS diminishes) — which makes the indifference curve convex to the origin.
Meaning of MRS:
The Marginal Rate of Substitution of X for Y (MRS(xy)) is the amount of good Y that a consumer is willing to give up in order to get one more unit of good X, while keeping his total satisfaction unchanged (i.e. remaining on the same indifference curve). It is the (numerical) slope of the indifference curve: MRS = ΔY ÷ ΔX.
The Law of Diminishing MRS:
The law states that as the consumer goes on substituting more and more of good X for good Y (consuming more X and less Y) while remaining on the same indifference curve, the marginal rate of substitution of X for Y goes on diminishing — that is, the consumer is willing to sacrifice fewer and fewer units of Y for each additional unit of X.
Illustration (schedule):
Suppose the combinations on an indifference curve are:
Combination A: 1 unit of X, 12 units of Y
Combination B: 2 units of X, 8 units of Y (gave up 4 Y for 1 X, MRS = 4)
Combination C: 3 units of X, 5 units of Y (gave up 3 Y for 1 X, MRS = 3)
Combination D: 4 units of X, 3 units of Y (gave up 2 Y for 1 X, MRS = 2)
Here MRS falls from 4 to 3 to 2 as more X is substituted for Y.
Reason for the law:
As the consumer gets more and more of good X, its marginal utility to him falls (he already has plenty of X), so he values each extra unit of X less; at the same time he has less and less of Y, so the marginal utility of Y rises and he values the remaining units of Y more. Hence he is willing to give up fewer units of Y for each additional unit of X — MRS diminishes.
Effect on the shape of the indifference curve: …
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