What is the ‘Marginal Rate of Substitution’

The marginal rate of substitution (MRS) is the amount of a good that a consumer is willing to give up for another good, as long as the new good is equally satisfying. It’s used in indifference theory to analyze consumer behavior.

The marginal rate of substitution is calculated between two goods placed on an indifference curve, displaying a frontier of equal utility for each combination of “good A” and “good B.”

The marginal rate of substitution is the rate of exchange between some units of goods X and Y which are equally preferred. The marginal rate of substitution of X for Y – MRS(xy) is the amount of Y that will be given up for obtaining each additional unit of X.

Marginal rate of substitution MRS(x,y) = the marginal rate of substitution between both goods.

MRS(x,y) = dx/dy
dx = the change in good x, the number of units a consumer is willing to give up
dy = the change in good y, the number of units a consumer gains by giving up units of good x

MBA question on this topic.

Q) The manager of a company was analysing the trend of the products of its company (Commodity Y) getting replaced by another substitute product available in the market which gives the same level of satisfaction to the consumers. Calculate the rate of Marginal Rate of Substitution and analyse the result.

Combination, Units of Commodity Y, Units of Commodity X, Total Utility
a, 40, 10, U
b, 25, 14, U
c, 17, 19, U
d, 10, 27, U
e, 7, 38, U

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