Economics - 0328 - 280 The PART 5 T HE C O N S U M E R or M...

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280 P A R T 5 THE C O N S U M E R The m arginal rate of substitution, or M R S, of good flin place of good Mis equal to M U fl / M U M , t h e ratio of the marginal utility of flto the marginal utility of M The principle of dim inishing marginal rate of substitution states that the more of good fla person consumes in propor- tion to good M , the less Mhe or she is willing to substitute for another unit of fl Two goods, fland M , are ordinary goods in a consumer's utility function when (1) the consumer requires addi- tional units of flto compensate for less M , and vice versa; and (2) the consumer experiences a diminishing marginal rate of substitution when substituting one good in place of another. The left-hand side of Equation 11-6 is the slope of the indifference curve; it is the rate at which Ingrid is willing to trade rooms (the good on the horizontal axis) in place of restaurant meals (the good on the vertical axis) without changing her total utility level. The right-hand side of Equation 11-6 is minus the ratio of the marginal utility of rooms to the marginal utility of restaurant meals—that is, the ratio of what she gains from one more room to what she gains from one more meal.
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