Answer:
(i) Marginal Rate of Substitution (MRS) refers to the rate at which a consumer is willing to substitute one good for each additional unit of the other good. Algebraically, \[MRS=\frac{\Delta Y}{\Delta X}\] It shows how many units of good Y the consumer is willing to sacrifice to gain one additional unit of good X. The following schedule explains the concepts of MRS: Consumption combination Units of good X Units of good Y MRSxy P 2 10 - Q 3 5 5 R 4 2 3 S 5 1 1 As the consumer moves from consumption combination P to consumption combination Q, consumption of good X increases from 2 units to 3 units while, the consumption of good Y falls from 10 units to 5 units. That is to gain one additional unit of good X, the consumer sacrifices 5 units of good K Thus, the MRS is 5. Similarly, as the consumer moves from point R to point 5, he is willing to sacrifice only one unit of good Y for one additional unit of good X. Thus, MRS is 1. (ii) Budget line is a line that represents the different combinations of two goods that are affordable and are available to a consumer given his/her level of income and the market prices of the goods if" the consumer spends his entire income on the two goods. The equation of the budget line is represented as follows: \[{{P}_{1}}{{x}_{1}}+{{P}_{2}}{{x}_{2}}=M\] For example, consider a consumer who has income (M) of Rs 100. He wants to purchase two goods, good 1 and good 2. Good 1 costs (\[{{P}_{1}}\]) Rs. 5 per unit, while good 2 costs (\[{{P}_{2}}\]) Rs. 4 per unit. In this case, the budget line is of the form, \[5{{x}_{1}}+4{{x}_{2}}=100\]
You need to login to perform this action.
You will be redirected in
3 sec
