Emily

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Marginal Rate of Substitution (MRS), Marginal Utility (MU), and How They Relate

Posted by Emily on 2/3/17 5:52 PM

Introduction

In this post, I start off explaining the Marginal Rate of Substitution (Sections II-IV). Then, I cover the concept of Marginal Utility (Sections V-VII). In both cases, I start with a story explanation, then give a formal definition, and finally provide some other useful information about the concept. After that, I connect the two concepts (Marginal Utility and Marginal Rate of Substitution) and show how they relate mathematically, first without calculus (Section VIII) and then with calculus (Section IX). Finally, I demonstrate that the Marginal Rate of Substitution has an advantage over Marginal Utility in terms of describing preferences and behavior (Section X), because it is less sensitive to the exact utility function you choose to use!

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Tags: economics