It is common for supermarkets to carry both generic (store-label) and brand-name (producer-label) varieties of sugar and other products. Many consumers view these products as perfect substitutes, meaning that consumers are always willing to substitute a constant proportion of the store brand for the producer brand. Consider a consumer who is always willing to substitute four pounds of a generic store-brand sugar for two pounds of a brand-name sugar. Do these preferences exhibit a diminishing marginal rate of substitution between store-brand and producer-brand sugar?

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Business

Jennifer Mcgrath

28 September, 22:43

It is common for supermarkets to carry both generic (store-label) and brand-name (producer-label) varieties of sugar and other products. Many consumers view these products as perfect substitutes, meaning that consumers are always willing to substitute a constant proportion of the store brand for the producer brand. Consider a consumer who is always willing to substitute four pounds of a generic store-brand sugar for two pounds of a brand-name sugar. Do these preferences exhibit a diminishing marginal rate of substitution between store-brand and producer-brand sugar?

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Darrell Hanna · Answer 1

Answer and explanation:

Yes, the fact that a consumer is willing to replace four pounds of generic store-brand sugar for two pounds of a brand-name sugar reflects a diminishing marginal rate of substitution. This type of marginal rate of substitution (MRS) explains how a consumer is willing to acquire less quantity of one good to get one more additional unit of another good that is equally satisfying. In a graph, the diminishing MRS is calculated using an indifference curve.