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Olivia’s marginal rate of substitution of doughnuts (X) for bagels (Y) equals 3/5. Explain the meaning...

Olivia’s marginal rate of substitution of doughnuts (X) for bagels (Y) equals 3/5. Explain the meaning of this particular numerical value for Olivia.

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Answer #1

marginal rate of substitution is called the slope of the indifference curve.

It is calculated using formula: MRS = MUx / MUy

where MUx = marginal utility from X

It is given that marginal rate of substitution of doughnuts (X) for bagels (Y) = 0.6

As Olivia consume more and more units of doughnuts, her desire to more doughnuts decreases and she would sacrifice less and less bagels for each additional doughnuts.

Value of 0.6 tells us that in order to consume one more doughnut, Olivia has to sacrifice the consumption of 0.6 bagels.

**if you liked the answer, then please upvote. Would be motivating for me. Thanks.

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