Intermediate microeconomics - indifference curve and marginal rate of substituition
An indifference curve shows a set of consumption bundles among which the individual is indifferent
Marginal Rate of Substitution
•The negative of the slope of the indifference curve at any point is called the marginal rate of substitution (MRS)
At (x1, y1), the indifference curve is steeper. The person would be willing to give up more y to gain additional units of x
At (x2, y2), the indifference curve is flatter. The person would be willing to give up less y to gain
additional units of x
•MRS changes as x and y change
–reflects the individual’s willingness to trade y for x
how to calculate MRS when utility function is given ?
•Suppose an individual’s preferences for hamburgers (y) and soft drinks (x) can be represented by
Solving for y, we get
y = 100/x
•Solving for MRS = -dy/dx:
MRS = -dy/dx = 100/x2
MRS = -dy/dx = 100/x2
•Note that as x rises, MRS falls
–when x = 5, MRS = 4
–when x = 20, MRS = 0.25
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