Q10 of 25 Page 1

Why should the marginal rate of substitution diminish for a stable consumer's equilibrium?

For the consumer equilibrium main factor other than satisfaction is the price. Price plays a very important role in the consumer equilibrium. Even though the indifference curve shows the same level of satisfaction in all the points but all the points may not be attainable for the consumers. In the above example the combination A, B, C, D and E show the same level of satisfaction for the consumer but the consumer can only choose any one combination with his limited budget. For the attaining the consumer equilibrium the budget line is drawn in the diagram of the indifference curve and equilibrium is attained when the IC is tangent to the budget line.


It is the condition which slope of IC is equal to the slope of the budget line


• MRSXY=MUX/MUY=PX/PY


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