Question

Consider a student whose final grade increases with the number of hours spent studying. Her choice is between more free time and higher grades, both of which are goods. Which of the following is the same as her marginal rate of substitution (MRS) between the two goods?

a.) The number of percentage points the student is willing to give up for another hour of free time.

b.) The number of percentage points the student would gain by giving up another hour of free time.

c.) The opportunity cost of free time.

d.) The slope of the student's feasible frontier.

Answer 1

Answer: d.) The slope of the student's feasible frontier.

We have seen that a consumer maximizes his utility by choosing the point where an indifference curve is tangential to the feasible frontier, at which the marginal rate of substitution (MRS) is equal to the marginal rate of transformation (MRT). The marginal rate of transformation (MRT) is the number of units or amount of a good that must be forgone in order to create or attain one unit of another good. In particular, it’s defined as the number of units of good X that will be foregone in order to produce an extra unit of good Y, while keeping constant the use of production factors and the technology being used. When utility is maximised slope of the indifference curve is equal to the slope of feasible frontier.