The slope of the indifference curve at any point is called the:
Select one:
A. Opportunity Cost B. Marginal Cost of Consumption C. Marginal Rate of Substitution (MRS) D. Marginal Utility of Income
The correct answer and explanation is:
The correct answer is C. Marginal Rate of Substitution (MRS).
The Marginal Rate of Substitution (MRS) represents the rate at which a consumer is willing to trade one good for another while maintaining the same level of satisfaction or utility. It is the slope of the indifference curve at any given point.
An indifference curve represents combinations of two goods that provide the same level of satisfaction to the consumer. The slope of this curve at any point reflects the rate at which the consumer is willing to substitute one good for another without changing their overall satisfaction. In other words, it shows how much of one good the consumer is willing to give up to gain one more unit of the other good, keeping utility constant.
Mathematically, the MRS is calculated as the ratio of the marginal utilities of the two goods. If a consumer has two goods, say good X and good Y, the MRS at any point on the indifference curve can be expressed as: MRS=MUXMUYMRS = \frac{MU_X}{MU_Y}
where MUXMU_X is the marginal utility of good X and MUYMU_Y is the marginal utility of good Y.
The MRS is typically negative because as a consumer consumes more of one good, they will generally be willing to give up less of the other good to maintain the same level of satisfaction. This diminishing willingness to substitute one good for another as the quantity of the first good increases is known as the Law of Diminishing Marginal Rate of Substitution.
In summary, the slope of the indifference curve at any point represents the Marginal Rate of Substitution (MRS), which illustrates how much of one good a consumer is willing to exchange for another good while maintaining the same level of utility.