1
$\begingroup$

The MRS$_{xy}$ is defined as $\left(-\frac{dy}{dx}\right)$ and Nicholson/Snyder (NS) writes it as the amount of $x$ we can trade for $y$ while remaining equally well off.

However, the analytical definition however tells something different, that in a sufficiently close neighbourhood of $(x,y)$, $y\mp \left(-\frac{dy}{dx}\right) = m(x \pm 1) + c$, which can be interpreted as: the amount of $y$ we need to give or get (trade off) for a unit of $x$ (while remaining equally well off).

The two statements sound contradictory, the first one says we need to exchange $x$ at the MRS for every unit of $x$ and the second one says quite the opposite, that we substitute $x$ at the MRS for every unit of $y$.

Is it a mistake in the book by NS?

$\endgroup$
10
  • $\begingroup$ Can you specify the reference? I have the 10th edition of NS here and it contains no such verbatim phrase. $\endgroup$
    – VARulle
    Jul 12 at 7:46
  • $\begingroup$ @VARulle Fig. 3.2, Page 92, 11th Ed. NS: The curve $U_1$ represents those combinations of $x$ and $y$ from which the individual derives the same utility. The slope of this curve represents the rate at which the individual is willing to trade $x$ for $y$ while remaining equally well off. This slope (or, more properly, the negative of the slope) is termed the marginal rate of substitution. In the figure, the indifference curve is drawn on the assumption of a diminishing marginal rate of substitution. $\endgroup$ Jul 12 at 7:52
  • $\begingroup$ Well, "the rate at which the individual is willing to trade x for y" is not the same as "the amount of x we can trade for y"... $\endgroup$
    – VARulle
    Jul 12 at 8:24
  • $\begingroup$ I guess there is a typo in "we need to exchange x at the MRS for every unit of x". $\endgroup$
    – VARulle
    Jul 12 at 11:35
  • 1
    $\begingroup$ I used to use NS for a micro class. The book has quite some (minor) mistakes & typo's. I guess this is one of them. $dy/dx$ measures how much of $y$ we need to give up to obtain an additional unit of $x$, keeping utility fixed. $\endgroup$
    – tdm
    Jul 12 at 12:43
1
$\begingroup$

No, it is not. The verbatime citation is The slope of this curve represents the rate at which the individual is willing to trade $x$ for $y$ while remaining equally well off.

To trade $x$ for $y$ here means to give up some $\Delta x$ to receive $\Delta y$ per unit of $\Delta x$. Letting $\Delta x\rightarrow 0$ the rate is $-\frac{dy}{dx}=MRS_{xy}$.

$\endgroup$
12
  • $\begingroup$ Let the utility function of a person be $U(x,y) = 2x + y$. We can probably agree that $|MRS_{xy}| = 2/1$. Would you say the person is willing to trade 2 units of $x$ for a unit of $y$? Or even that the person is willing to trade $x$ for $y$ at a 2:1 ratio? $\endgroup$
    – Giskard
    Jul 12 at 8:40
  • $\begingroup$ @Giskard, no, 2 units of $y$ for a unit of $x$, as I wrote. $\endgroup$
    – VARulle
    Jul 12 at 8:47
  • $\begingroup$ Where did you write this? Seems to me like you wrote "To trade $x$ for $y$ means to give up some $\Delta x$ to receive $\Delta y$." and then you implied the rate of trading was equal to the marginal rate of substitution? And "some $\Delta x$" implies this is the quantity of $x$ traded? $\endgroup$
    – Giskard
    Jul 12 at 9:00
  • $\begingroup$ @Giskard, exactly. But I don't understand your problem with this. I'm not a native English speaker, so maybe I'm unclear or wrong, but where exactly? $\endgroup$
    – VARulle
    Jul 12 at 9:31
  • $\begingroup$ Neither am I :) But I believe "to trade specified_quantity of $x$ for $y$" implies the same slope as "to trade $\frac{1}{\text{specified_quantity}}$ of $y$ for $x$". The difference in trading direction is, in my opinion, the basis of the question. $\endgroup$
    – Giskard
    Jul 12 at 11:03

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.