Answer to Question #84089 in Microeconomics for Nandy

Question

Slope of budget line= change in y/ change in x and also Marginal rate of substitution= change in y/ change in x. If the definitions are same of both then what is the difference between the two?

Answer 1

The slope of the budget line alludes to the ratio of individual prices of two goods in a given consumer basket. Similarly, the marginal rate of substitution (MRS) is the ratio of units of goods y that the consumer is willing to give up divided by a number of additional units for goods x. One difference between the budget line and MRS is that the slope of the budget line is constant whereas that MRS varies along the indifference curve. The slope of the budget line indicates the various combinations of units of good x and y that the consumer can afford at different levels of income given a specific price (Dwivedi, 2010). Given specific prices for two goods, the slope of the budget line shows different combinations or bundles of two goods that the consumer can afford the same income.

Conversely, the MRS shows the number of units of good y that the consumer can substitute for certain units of good x. Here, the consumer sacrifices a certain quantity of good y to obtain more unit of x to achieve the same level of satisfaction. Furthermore, the slope of the budget line is constraint by price and the income that the consumer is willing to spend on two goods at the market price of two goods. On the other hand, MRS is not depended on income or price of the two goods but instead occurs during the consumption process. The consumer can substitute good A with another good B with as many units of the good at different points along the indifference curve.