What is the marginal rate of substitution and how does it relate to an indifference curve?
What will be an ideal response?
The marginal rate of substitution is the rate at which a person will give up the good measured along the y-axis in order to get more of the good measured along the x-axis. The marginal rate of substitution equals the magnitude of the slope of the indifference curve. Because the indifference curve is not linear, the marginal rate of substitution changes as the consumer moves along the indifference curve. In particular, as more of the good measured along the x-axis is consumed, its marginal rate of substitution diminishes. In general, as more of a good is consumed, its marginal rate of substitution decreases.
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When the private costs and the social costs are NOT the same, there is a(n)
A) externality. B) internality. C) public good. D) monopoly.
The cost effect implies that
A. Higher costs are reflected in higher average prices. B. The aggregate demand curve is downward-sloping. C. The aggregate supply curve is linear. D. Lower average prices result in greater quantity supplied.