What is the Marginal Rate of Substitution (MRS)?

(A) The rate at which a consumer is willing to substitute one good for another.
(B) Equal to the slope of the indifference curve.
(C) Changes as we move along the indifference curve.
(D) Is constant for perfect substitutes.

Choose the correct answer from the options given below:

(A), (B) and (D) only

The correct answer is Option (1) → (A), (B) and (D) only

The Marginal Rate of Substitution (MRS) is a fundamental concept in consumer theory, representing how a consumer trades off one good for another while maintaining the same level of satisfaction. It's depicted by the slope of an indifference curve.

(A) The rate at which a consumer is willing to substitute one good for another. Correct. This is the core definition of MRS. It quantifies how much of good Y a consumer is willing to give up to get an additional unit of good X, without changing their overall utility.

(B) Equal to the slope of the indifference curve. Correct. An indifference curve plots all combinations of two goods that provide a consumer with an equal level of utility. The slope of this curve at any point reveals the MRS between the two goods at that specific combination. Geometrically, it's the negative of the slope of the indifference curve.

(D) Is constant for perfect substitutes. Correct. Perfect substitutes are goods that a consumer considers to be identical or interchangeable (e.g., different brands of generic painkillers if they have the same active ingredient). For perfect substitutes, the consumer is willing to trade them at a constant rate, regardless of how much of each they possess. This results in straight-line indifference curves, and thus, a constant MRS throughout the curve.

(C) Changes as we move along the indifference curve. Not completely correct. For most goods (which exhibit diminishing marginal utility and are not perfect substitutes), indifference curves are convex to the origin. This convexity implies the Law of Diminishing Marginal Rate of Substitution. As a consumer acquires more of one good (say, Good X) and consequently has less of the other good (Good Y), their willingness to give up Good Y for an additional unit of Good X decreases. In other words, as you move down a typical convex indifference curve, the slope becomes flatter, indicating a decreasing (changing) MRS. While true for the general and most common case of consumer preferences (convex indifference curves), this statement is not universally true for all types of goods. As established in statement (D), for perfect substitutes, the MRS is constant and does not change as you move along the indifference curve.

Note: The answer is as per NTA.