If you are willing to give up 10 units of good Y (on the vertical axis) for 5 units of good X (on the horizontal axis), and your level of satisfaction is unchanged, the marginal rate of substitution is:
A) 0.5.
B) 2.
C) 5.
D) 10.

Question

Quizplus · Accepted Answer

The slope of the indifference curve at the point where the consumer is willing to give up 10 units of Y for 5 units of X is -10/5 = -2, which is the marginal rate of substitution. Therefore, the answer is B.

As for the best choice, it depends on the prices of X and Y. If the price of X is lower than the marginal rate of substitution (in this case, lower than 2), the consumer should consume more of X and less of Y until the ratio of prices (the slope of the budget constraint) equals the marginal rate of substitution. If the price of Y is lower than the marginal rate of substitution, the consumer should consume more of Y and less of X until the ratio of prices equals the marginal rate of substitution. If the prices of X and Y are equal to the marginal rate of substitution, the consumer can choose any combination of X and Y that lies on the budget constraint and the indifference curve.

If You Are Willing to Give Up 10 Units of Good