Which of the following statements is true?
Statement 1: MRS is simply the rate at which the consumer will substitute bananas for mangoes, so that her total utility remains constant.
Statement 2: As we move down along the indifference curve, MRS falls.
Answer & explanation
Correct answer: option 1
The correct answer is option 1: Both the statements are true
Statement 1: MRS is simply the rate at which the consumer will substitute bananas for mangoes, so that her total utility remains constant. This is true. The Marginal Rate of Substitution (MRS) is defined as the rate at which a consumer is willing to substitute one good (e.g., bananas) for another (e.g., mangoes) while keeping their total utility or satisfaction level constant.
Statement 2: As we move down along the indifference curve, MRS falls. This statement is also true because of the principle of diminishing marginal rate of substitution. As a consumer keeps consuming more bananas and fewer mangoes, the willingness to give up mangoes for additional bananas gradually decreases. Hence, MRS falls along a downward sloping indifference curve.