Economics Marginal Utility Questions Long
The marginal utility theory explains the law of diminishing marginal rate of substitution by analyzing the relationship between the marginal utility derived from consuming different goods and the willingness of an individual to substitute one good for another.
According to the marginal utility theory, individuals aim to maximize their total utility or satisfaction from consuming goods and services. The theory suggests that as individuals consume more of a particular good, the additional satisfaction or utility derived from each additional unit of that good tends to decrease. This is known as the law of diminishing marginal utility.
The law of diminishing marginal utility states that as the consumption of a particular good increases, the marginal utility derived from each additional unit of that good decreases. In other words, the more of a good an individual consumes, the less satisfaction or utility they derive from each additional unit.
Now, the law of diminishing marginal rate of substitution is closely related to the law of diminishing marginal utility. It explains how individuals make choices between different goods in order to maximize their utility.
The marginal rate of substitution (MRS) measures the rate at which an individual is willing to give up one good in exchange for another while maintaining the same level of satisfaction. It represents the amount of one good that an individual is willing to sacrifice to obtain an additional unit of another good.
According to the law of diminishing marginal rate of substitution, as an individual consumes more of a particular good, the willingness to substitute that good for another decreases. This is because the marginal utility derived from the additional unit of the good being consumed is decreasing, making the individual less willing to give up more of that good in exchange for another.
In simpler terms, as an individual consumes more of a good, the marginal utility derived from that good decreases, leading to a decrease in the willingness to substitute it for another good. This is because the individual values each additional unit of the good less and is therefore less willing to give it up in exchange for another good.
Overall, the marginal utility theory explains the law of diminishing marginal rate of substitution by highlighting the relationship between the diminishing marginal utility of a good and the decreasing willingness to substitute it for another good as consumption increases.