Discussion
Why does the marginal rate of substitution of one good for another diminish ?
(i) Satiability for a particular good
(ii) Goods are imperfect substitutes of each other
(iii) The income of the consumer is fixed
(iv) Diminishing marginal utility of goods
Answer: C
The reasons are (i), (ii) and (iv).
The MRS of X for Y falls as a consumer takes more X because (i) wants for a particular good are satiable, so the intensity of desire for X declines; (ii) the goods are imperfect substitutes, so X cannot fully replace Y; and (iv) in the cardinal account, marginal utility of X falls while that of Y rises as Y is given up.
(iii), fixed income, defines the budget line, not the shape of the indifference curve, so the options that include (iii) are wrong.
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