marginal rate of substitution


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marginal rate of substitution

a ratio of the MARGINAL UTILITIES of two products. It is measured by the slope of the consumer's INDIFFERENCE CURVE between the two products. As an individual consumes more of one product (A), he will tend to become satiated with it and would be prepared to give up less of an alternative product in order to acquire more units of A (a diminishing marginal rate of substitution). In order to maximize his utility, a consumer must equate the ratio of the marginal utilities of the two products to the ratio of their prices (see CONSUMER EQUILIBRIUM). For an economy, the optimal distribution of national output is achieved when the marginal rate of substitution for all consumers is equal. See PARETO OPTIMALITY, EDGEWORTH BOX.
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By using an expression which is currently employed in the literature in a related context, we can summarise the above interpretation of the marginal rate of substitution by saying that [MRS.
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It is straightforward to show that the marginal rate of substitution between consumption and labor is given by
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equals p/(1 - p), we have from equation (2) that the marginal rate of substitution at the endowment point [E.
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The pricing kernel is the intertemporal marginal rate of substitution in consumption, denoted log([m.
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