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86 CHAPTER 3 CONSUMER PREFERENCES AND THE CONCEPT OF UTILITY

Preference
directions
B
A
y
FIGURE 3.8 Indifference Curves Are Not “Thick” U 0
A thick indifference curve U 0 contains baskets A and B. But
B lies to the northeast of A, so the utility at B must be
higher than the utility at A. Therefore, A and B cannot be x
on the same indifference curve.

The Marginal Rate of Substitution
A consumer’s willingness to substitute one good for another while maintaining the
marginal rate of sub- same level of satisfaction is called the marginal rate of substitution. For example, a
stitution The rate at consumer’s marginal rate of substitution of hamburgers for lemonade is the rate at
which the consumer will which the consumer would be willing to give up glasses of lemonade to get more ham-
give up one good to get burgers, with the same overall satisfaction.
more of another, holding When two goods have positive marginal utilities, the trade-off that the consumer
the level of utility constant.
is willing to make between the two goods is illustrated by the slope of the indiffer-
ence curve. To see why, consider the indifference curve U in Figure 3.9, which
0
shows the weekly consumption of hamburgers and glasses of lemonade by a particu-
lar consumer, Eric. When Eric moves from any given basket, such as basket A, to an
equally preferred basket farther to the right on the curve, such as basket B, he must
give up some of one good (glasses of lemonade) to get more of the other good (ham-
burgers). The slope of the indifference curve at any point (i.e., the slope of the line
tangent to the curve at that point) is ¢y ¢ x —the rate of change of y relative to the
change of x. But this is exactly Eric’s marginal rate of substitution of hamburgers for
lemonade––the amount of lemonade he would give up ( y) to gain additional ham-
burgers ( x).

Preference
y, glasses of lemonade per week
directions

FIGURE 3.9 The Marginal Rate of Substitution of x for y A
(MRS x,y ) B
The marginal rate of substitution of x for y (MRS x,y ) is the rate C
at which the consumer is willing to give up y in order to get D
more of x, holding utility constant. On a graph with x on the
horizontal axis and y on the vertical axis, MRS x,y at any basket U
is the negative of the slope of the indifference curve through 0
that basket. At basket A the slope of the indifference curve is
5, so MRS x,y 5. At basket D the slope of the indifference x, hamburgers per week
curve is 2, so MRS x,y 2.