Daniel l. Rubinfeld

68 Part 2 Producers, Consumers, and Competitive Markets
Chapter 3 Consumer Behavior 69
M=
16
Clothing
(units per
week) 1-b
12
10
8
-6
Thus the MRS at any point is equal in magnitude to the slope of the indifference
curve. In Figure 3.5, for example, the MRS between points A and B is 6: The
consumer is willing to give up 6 units of clothing to obtain 1 additional unit of
food, Between points Band 0, however, the MRS is 4: With these quantities of
food and clothing, the consumer is willing to give up only 4 units of clothina to
obtain 1 additional unit of food. 0
Also observe in Figure 3.5 that the MRS falls as we move down the
indifference curve. This is not a coincidence. This decline in the MRS reflects an
important characteristic of consumer preferences. To understand this, we will
add an additional assumption regarding consumer preferences to the three that
we discussed earlier in the chapter:
6
-b
2
2 3
G
5 Food
(units per week)
4. Diminishing. Illargil1.c3,Lra le_oLsubstituti on: Indifference curves are convex
or bowed inward. The term cOllve .... means that the slope of the indifferen~~
curve ill creases (i.e., becomes less negative) as we move down along the
curve. In other words, Illl illdifferellce curve is call vex if the MRS dimillishes
Il/ollg the clirve. The indifference curve in Figure 3.5 is convex. As we have
seen, starting with market basket A in Figure 3.5 and moving to basket B, the
MRS of food F for clothing C is ~C/.lF = - (- 6)/1 = 6, However, when
we start at basket B and move from B to 0, the MRS falls to 4, If we start at
basket D and move to E, the MRS is 2. Starting at E and moving to G, we get
an MRS of 1. As food consumption increases, the slope of the indifference
curve falls in magnitude. Thus the MRS also falls. 2
marginal rate of substitution
(MRS) Amount of a good
that a consumer is willing to
give up in order to obtain one
additional unit of another
good.
111e slope of an indifference curve measures the consumer's marginal rate of substitution
(MRS) between two goods. In this figure, the MRS behveen clothing (C) and
food (F) falls from 6 (between A and B) to 4 (between B and D) to 2 (behveen D and E)
to 1 (beh\'een E and G). When the MRS diminishes along an indifference curve, the
curve is convex.
Marginal
To quantify the amount of one good that a consumer will give up to obtain more
of another, we use a measure called the marginal rate of substitution (MRS).
The MRS off'ood F f'or clothing C is the 1lll101lIZt of clothing tllllt II person is willillg to
giue lip to obtllin one Ildditiollill lInit off'ood. Suppose, for example, the MRS is 3.
This means that the consumer will give up 3 units of clothing to obtain 1 additional
unit of food. If the MRS is 1/2, the consumer is willing to give up only
1/2 unit of clothing. Thus, the MRS measures the mille that the individuill pillces Oil
1 extm lInit of one good in terms of another.
Look again at Figure 3S Note that clothing appears on the vertical axis and
food on the horizontal axis. When vve describe the MRS, we must be clear about
which good we are giving up and which we are getting more of. To be consistent
throughout the book, we will define the MRS in terms of the alllolillt of the good 011
the uerticiliaxis that the COll51l11ler is willing to give lip to Obtllill 1 extm lInit of the good
on the llOri20lltlllaxis. Thus in Figure 3.5, the MRS refers to the amount of clothing
that the consumer is willing to give up to obtain an additional unit of food. If we
denote the cJzllIzge in clothing by .lC and the change in food by .IF, the MRS can
be written as - .lC/.lF. We add the negative sign to make the marginal rate of
substitution a positive number (remember that ~C is always negative; the con­
SUlT1.er gives lip clothing to obtain additional food).
Is it reasonable to expect indifference curves to be convex Yes. As more and
more of one good is consumed, we can expect that a conSUIl1er will prefer to aive
up fewer and fewer muts of a second good to get additionallmits of the fil'st ~ne.
As we move down the indifference curve in Figure 3.5 and consumption of food
increases, the additional satisfaction that a consumer gets from still more food will
dimirush. Thus, he will give up less and less clothing to obtain additional food.
Another way of describir1g this prir1ciple is to say that conSUIl1ers generally prefer
balanced market baskets to market baskets that contain all of one aood and
none of another. Note from Figure 3.5 that a relatively balanced market basket
contairung 3 uruts of food and 6 ruuts of clothir1a (basket D) aenerates as much satisfaction
as another market basket containino tmut of fool and 16 muts of clothin~
(bas~et A). It follows that a balanced malket basket containing (for example) 6
lUutS of tood and 8 m1its of clothing will generate a higher level of satisfaction.
Perfect Substitutes and! Perfect Complements
The shape of an indifference curve describes the willinaness of a consumer to
~ubs~itute one good for another. An indifference curve °with a different shape
unphes a different willingness to substitute. To see this principle, look at the two
polar cases illustrated in Figure 3.6.
Figure 3.6(a) shows Bob's preferences for apple juice and orange juice. 111ese
two goods are perfect substitutes for Bob because he is entirely indifferent
between having a glass of one or the other. In Hus case, the MRS of apple juice
for orange juice is 1: Bob is always willir1g to h'ade 1 glass of one for 1 glass of the
2 With noncom' ex preferences, the MRS increases as the amount of the (Tood measured on the hori­
~ontal axis increases along any indifference curve .. This unlikely possibility might arise if one or both
"oods are addICtIve. For e~ample, the wIllmgness to substitute an addictive drug for other goods
mIght mcrease as the use ot the addIctl\"e drug mcreased
In §2 .. 1, ,ve explain that goods
are substitlltes when an
increase in the price of one
leads to an increase in the
quantity demanded of the
other.