Statement I : The slope of an indifference curve is the Marginal Rate of Substitution in the…
Statement I is incorrect because the Marginal Rate of Substitution in consumption (MRSc, the absolute slope of a convex indifference curve) is diminishing—not increasing—as…
Choose your answer
Statement I : The slope of an indifference curve is the Marginal Rate of Substitution in the consumption (MRSc), which is increasing.
Statement II : The slope of the budget line is ratio of the prices of two goods and is the Marginal Rate of Substitution in exchange (MRSe)
Answer and explanation
Correct answer D
Statement I is incorrect because the Marginal Rate of Substitution in consumption (MRSc, the absolute slope of a convex indifference curve) is diminishing—not increasing—as a consumer substitutes one good for another. Statement II is correct because the slope of the budget line (Px/Py) represents the Marginal Rate of Substitution in exchange (MRSe).
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