Answer to Question #45900 in Economics of Enterprise for Behailu

Question

Explain the concept of marginal rate of substitution and marginal rate of transformation. And show these concepts graphically?

Answer 1

Marginal rate of substitution is the slope of the indifference curve. It is the rate at which the consumer is willing to give up certain units of a good in order to get an additional unit of another good. it is equal to the ratio of the Marginal Utilities of the 2 goods. Marginal rate of transformation is the slope of the production possibiltiy frontier. it is the rate at which the producer is willing to give up the production of certain units of a good in order to increase the prpduction of the other good by 1 unit (by shifting the inputs more towards the production of the last good). it is equal to the ratio of the marginal costs of the 2 goods.