b. Mary has two dinner options available: eating a home cooked meal for $150 per meal, or at a restaurant for $260 per meal. Her weekly budget is $2500. iii. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution.
b. Mary has two dinner options available: eating a home cooked meal for $150 per
meal, or at a restaurant for $260 per meal. Her weekly budget is $2500.
iii. What would be the marginal rate of substitution at the point that
corresponds to the optimal consumption choice? Interpret the marginal
rate of substitution.
The marginal rate of substitution is the slope of the indifference curve that tells us the rate at which a consumer leaves one good in exchange for the other good. the marginal rate of substitution forms a convex to the origin curve for a consumer because of the diminishing marginal utility that as it moves away from the center of the curve, the value for the good towards to axis falls because then he/she will be consuming more of that good and his/her value decreases. Thus a concave curve is made to show the law of diminishing marginal utility.
The indifference shows utility or satisfaction as constant along the curve while the Marginal rate of substitution varies.
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