RELATIONSHIP BETWEEN MARGINAL RATE OF SUBSTITUTION AND MARGINAL UTILITIES
IN THIS VIDEO I HAVE DISCUSSED THE RELATIONSHIP BETWEEN MARGINAL RATE OF SUBSTITUTION AND MARGINAL UTILITIES. MARGINAL RATE OF SUBSTITUTION OF X FOR Y IS EQUAL TO THE RATIOS OF MARGINAL UTILITIES OF X AND Y. AS THE CONSUMER CONSUMES ONE ADDITIONAL UNIT OF X S/HE MUST SACRIFICE SOME Y IN ORDER TO REMAIN INDIFFERENT BETWEEN TWO COMBINATIONS. THUS THE UTILITY SACRIFICED (OF Y) MUST BE EQUAL TO UTILITY GAINED (OF X). THUS MUy * SACRIFICE OF Y = MUx * GAIN OF X. BY TRANSPOSING WE GET MRSxy = MUx/MUy. Y