Question

Olivia’s marginal rate of substitution of doughnuts (X) for bagels (Y) equals 2/7. Explain the meaning of this particular numerical value for Olivia.

Answer 1

Marginal rate of substitution (MRS) between two goods, say X and Y, is the amount of good Y a consumer is willing to exchange in order to consume an additional unit of good X.

MRS is the slope of the indifference curve- a graph which represents combinations of two goods which give equal satisfaction to the individual.

Now, it is given that MRS(X,Y) = 2/7

The marginal rate of substitution of doughnuts for bagels is 2/7, means that Olivia is willing to give up 2/7 units of bagels in order to consume an additional unit of doughnut.