Question

It is about marginal rate of substitution.

ng MuleA dedu Mu AC A C 그 А.IR .AL. . 8 -44 4 2, hs L 2 Convesity

C stands for consumption

L stands for leisure time

U(C, L) = f(C, L)

I understand that in order to stay on the indifference curve, the increase in utility of C should be equal to the decrease in utility of L (suppose I exchange L for C).

My problem is why the equation is ẟL * MUL + ẟC * MUC = 0 and MRS= MUL / MUC . Does the first equation mean the utility of last L I give up = the utility of last C I get? But why the equation is not ẟL (change in amount of leisure time) * average utility of L + ẟC (change in amount of consumption) * average utility of C = 0

Answer 1

In the above equation, ẟL * MUL + ẟC * MUC = 0, it is equal to zero because along the same indifference curve the utility does not change. The movement along the same indifference curve leads to no change in utility. Also,it means that utility of L1 given up = utility of the last C1 and thus there is no change in net utility.. Thus, the above equation is equated to zero.

It is observed that marginal utility is taken in the equation and not the average utility because the equation computes the change in the level of utility with the addition of use unit of extra work or leisure, thus,, marginal utility is taken to compute the change.