LAW OF MARGINAL RATE OF SUBSTITUTION

by • 24/06/2011 • B.COM PART 1 EconomicsComments (0)889

Marginal rate of substitution goes on decreasing therefore it is called “Law of diminishing marginal rate of substitution.”

If a person has more unit of good X then he goes on losing interest in X and in latter transaction he will be prepared to give away less units of Y for the exchange of X. Hence MRS of X for Y diminishes as the consumer has more of X and less of Y.

In the table given below in combination B, consumer is willing to give away 3 Ys for one X, but in transaction C for one more X,  he is ready to exchange it with only two Y, whereas in the last transaction, he is ready to exchange for additional X, with only one Y, it means the rate of exchange is continuously diminishing and the only reason is reducing the stock of Y, the importance of Y is now increasing for him and he is not willing to give away or exchange it with same number of commodity X.

Combinations

X

Y

M.R.S Of X for Y

A

1

7

B

2

4

1:3

C

3

2

1:2

D

4

1

1:1

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