In the following graph, at point W (and ignoring the negative signs), the marginal rate of transformation (MRT) in production __________ the marginal rate of substitution (MRS) in consumption.

A) is greater than
B) is equal to
C) is less than
D) has no determinate relationship to

Question

In the following graph, at point W (and ignoring the negative signs), the marginal rate of transformation (MRT) in production __________ the marginal rate of substitution (MRS) in consumption.

A) is greater than 
B) is equal to 
C) is less than 
D) has no determinate relationship to

Quizplus · Accepted Answer

At point W, the MRT is steeper (i.e., the absolute value is larger) than the MRS. This indicates that to produce an additional unit of X, a larger amount of Y has to be given up than what is gained (i.e., the opportunity cost is high). On the other hand, at point W, the MRS indicates the amount of Y that has to be given up to obtain an additional unit of X while keeping utility constant. The fact that the slope of the MRT is steeper than the slope of the MRS indicates that the opportunity cost of producing an additional unit of X is higher than the amount of Y that has to be given up to obtain an additional unit of X while keeping utility constant. Therefore, option C is the best choice.

In the Following Graph, at Point W (And Ignoring the Negative