When the consumer has chosen his or her optimal values of first-period and second-period consumption, the marginal rate of substitution equals:
A)1 plus the interest rate r.
B)1 minus the interest rate r.
C)1 divided by the interest rate
D)r. the interest rate r.

Question

Quizplus · Accepted Answer

The marginal rate of substitution (MRS) between first-period and second-period consumption equals 1 plus the interest rate (1 + r) when the consumer is optimizing. This reflects the trade-off between consuming today versus saving and consuming in the future, accounting for the interest earned.

When the Consumer Has Chosen His or Her Optimal Values