What would be the value of the Marginal Rate of Substitution (MRS) when Good-X increases by 5 with the decrease of Good-Y by 15?
What would be the value of the Marginal Rate of Substitution (MRS) when Good-X increases by 5 with the decrease of Good-Y by 15?
Solution
Option 1 -> Incorrect calculation of the ratio.
Option 2 -> This would be the inverse ratio with wrong sign.
Option 3 -> Correct application of MRS formula: ΔY/ΔX = -15/5 = -3.
Option 4 -> This ignores the negative change in Good-Y.
Hence, Option 3: -3 -> The Marginal Rate of Substitution (MRS) measures the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same utility level. It is calculated as MRS = ΔY/ΔX. Given that Good-X increases by 5 (ΔX = +5) and Good-Y decreases by 15 (ΔY = -15), we get MRS = -15/5 = -3. The negative sign indicates that as consumption of Good-X increases, consumption of Good-Y decreases, which is the typical trade-off pattern on an indifference curve. -> correct
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