5.9 : Calculating Marginal Rate of Substitution

The marginal rate of substitution, or MRS, is the rate at which a consumer is ready to give up one product in exchange for another while maintaining the same satisfaction.

John enjoys meals at a restaurant and watching movies in a theater. The table shows various combinations of these that satisfy him equally.

MRS of watching movies in a theater for meals at a restaurant is calculated as the number of meals at a restaurant that John is willing to give up every month for an extra opportunity to watch movies in a theater.

For instance, with Basket A, John has meals at a restaurant eighteen times. On moving from Basket A to B, John has meals at a restaurant only eleven times. He gives up seven meals at a restaurant for watching an extra movie in a theater. This means that MRS is seven.

In general, consider the indifference curve IC depicting relative preferences for goods X and Y.

MRS for these goods, X and Y, is the quotient of change in the quantity of Good Y and Good X while moving from one point to another on the indifference curve. This is the same as the slope of the indifference curve.