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 r.
D) 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 r. This is because the MRS reflects the rate at which a consumer is willing to trade off consumption in one period for consumption in another, taking into account the opportunity cost of consuming now versus later, which is affected by the interest rate.

When the Consumer Has Chosen His or Her Optimal Values