Briefly explain the following concepts.

(a) What are monotonic preferences?   

(b) Marginal Rate of substitution.

(c)    Consumer's Preferences. It is assumed that a consumer is rational and has well defined preferences to the set of bundles available to him. He can compare any two bundles and either prefers one to the other or is indifferent (neutral) to the two. He can rank the bundles in order of his preferences over them and chooses his most preferred bundle. A consumer's preferences are monotonic.

Monotonic preferences. Consumer's preferences are monotonic if and only if between two bundles, consumer prefers the bundle which has more of atleast one of the good and not less of other good as compared to other bundles. In other words consumer's preferences are called monotonic when between any two bundles (x₁, x₂) and (y₁, y₂), if (x₁, x₂) has more of at least one of the goods and no less of the other good as compared to (y₁, y₂), the consumer prefers (x₁, x₂) to (y₁, y₁). For example, between two bundles (10, 9) and (9, 9), consumer's preference of bundle (10, 9) to (9, 9) will be called monotonic preference.

(d)    Marginal Rate of Substitution (MRS). The rate of substitution of one commodity for another is known as marginal rate of substitution. Let the two goods be x and y. MRS is the rate at which a consumer is willing to give up the amount of y for getting an extra unit of x without affecting his total utility. This is expressed as MRS_xy which is read as marginal rate of substitution of good x for good y. Thus, the MRS of good x for good y is the amount of good y which will be sacrificed for obtaining an additional unit of good x. Symbolically:


This is illustrated in the adjoining Fig. 2.6.

Fig. 2.6

We take two points A and B on the adjoining indifference curve. At point A, a consumer gets combination of OR (= MA) of good y and OM (= RA) of good x. Suppose he shifts to point B where he gets combination of OS (= MC) of good y and ON (= SB) of good x. By this change he loses AC (= MA - MC) amount of good y and gains CB (= ON - OM) amount of good x which means he is willing to substitute goods x for goods y at the rate of    Thus MRS can be defined as the rate at which a consumer is willing to sacrifice a unit of one good for getting an extra unit of another good without affecting his total utility. It needs to be noted that    is the slope of indifference curve and this is called MRS of good x for good y.  Diminishing Marginal Rate of Substitution. Since marginal utility of good x goes on falling with every increase in units of x, therefore, consumer will be willing to sacrifice lesser quantity of good y for obtaining additional units of x. Hence we can say that marginal rate of substitution (MRS) is always diminishing. (Let it be noted that for consumer's equilibrium, MRS must be equal to ratio of prices of two goods, i.e., P_x/P_y).