Why the marginal rate of substitution must be equal to the ratio of prices of two goods in equilibrium?

Answer: Marginal Rate of Substitution (MRS) must be equal to the ratio of prices, also called the Market Rate of Exchange (MRE) to attain consumer equilibrium. MRS is the rate at which the consumer is willing to sacrifice units of one good in order to obtain a unit of another.

Why an MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction?

6. Explain why an MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction. The MRS describes the rate at which the consumer is willing to trade off one good for another to maintain the same level of satisfaction.

What is the marginal rate of substitution and how does it relate to an indifference curve?

The marginal rate of substitution is a term used in economics that refers to the amount of one good that is substitutable for another and is used to analyze consumer behaviors for a variety of purposes. Essentially, MRS is the slope of the indifference curve at any single point along the curve.

Is marginal rate of substitution is constant throughout the indifference curve will be?

If Marginal Rate of Substitution is constant throughout, the Indifference curve will. be. Parallel to the x-axis.

Why is an indifference curve convex to the origin?

Indifference curves are convex to the origin because as the consumer begins to increase his or her use of one good over another, the curve represents the marginal rate of substitution. The marginal rate of substitution goes down as the consumer gives up one good for another, so it is convex to the origin.

What happens to MRS when consumer moves downward along the indifference curve?

Marginal Rate of Substitution diminishes as the consumer moves downward along the same indifference curve. it shows that consumer is willing to sacrifice lesser units of a Good Y, in order to gain one additional unit of Good X. This happens due to the operation of law of diminishing marginal utility.

Why does the marginal rate of substitution diminish?

An important principle of economic theory is that marginal rate of substitution of X for Y diminishes as more and more of good X is substituted for good Y. In other words, as the consumer has more and more of good X, he is prepared to forego less and less of good Y.

What is the impact of diminishing marginal rate of substitution on the slope of indifference curve?

In short, the slope of the indifference curve changes because the marginal rate of substitution—that is, the quantity of one good that would be traded for the other good to keep utility constant—also changes, as a result of diminishing marginal utility of both goods.

Why do two indifference curves not intersect each other?

The indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is absurd and impossible.

What happens to MU when Tu is maximum and constant?

Mu becomes zero. The term MU stands for marginal utility, while TU stands for total utility.