4 What is the key assumption about a consumer’s marginal rate of substitution? The marginal rate of substitution (or MRS ) is the rate at which a person will give up good y (the good measured on the y -axis) to get an additional unit of good x (the good measured on the x -axis) and at the same time remain indifferent (remain on the same indifference curve). The magnitude of the slope of an indifference curve measures the marginal rate of substitution.

1 If the indifference curve is steep, the marginal rate of substitution is high. The person is willing to give up a large quantity of good y in exchange for a small quantity of good x while remaining indifferent 2 If the indifference curve is flat, the marginal rate of substitution is low. The person is willing to give up only a small amount of good y in exchange for a large amount of good x to remain indifferent Figure 8.4 shows you how to calculate the marginal rate of substitution. Suppose that Lisa drinks 6 packs of cola and sees 2 films at point C on indifference curve I1.

To calculate her marginal rate of substitution, we measure the magnitude of the slope of the indifference curve at point C. To measure this magnitude, place a straight line against, or tangent to, the indifference curve at point C.

Along that line, as the quantity of cola decreases by 10 packs, the number of films increases by 5 – an average of 2 packs per film. So at point C, Lisa is willing to give up cola for films at the rate of 2 packs per film – a marginal rate of substitution of 2.