Explore BrainMass

Managerial Economics: Marginal Rate and Price Elasticity

I need help with the following topics: What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate.

Guided Response:
In 300 words or more, please provide your response to the above discussion question. Find two goods from your own consumption basket and explain how the MRS changes for the two products as you substitute one for the other

The tobacco industry is a prime example to consider when talking about price elasticity of demand. While nicotine use can be addictive for many users, it is not addictive for the so-called "social smokers".

Hainer, R. (2010). Social smokers aren't hooked on nicotine, just smoking. Cable News Network. Retrieved from Weather, Entertainment & Video News. Retrieved November 13, 2012, from ttp://

What can we say about the price elasticity of demand for nicotine products (such as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the group of "social smokers"? Can we say whose demand is likely to be more elastic? Why?

Guided Response:
Provide your response to the discussion question in 300 words or more. Further, comment on the effectiveness of government policy aimed at reducing the negative effects of smoking on health. For example, consider high taxation on producers? - is that effective?

Solution Preview

Managerial Economics

When looking at the Marginal Rate of Substitution (MRS), it is important to understand the basic principle that drives the idea. If a person is presented with two products, both acceptable, but one more prized; how much of one will they give up for the other. The Formula for MRS can be determined as follows. MRSxy = Good Y / Good X (Marginal rate of substitution, 2010). Note that the marginal rate of substitution (MRS) is the personal exchange rate of the consumer in contrast to the market exchange rate. The idea of MRS can be exampled in the world of consumer and producer. That is to say, consumers may have two similar products that they like, but one particularly more than the other. On the other hand, a company may have two similar products, but one is cheaper than the other to produce. The trade off between these choices comes at the expense of what must be sacrificed to obtain the other. The optimal solution would be gaining one without being any worse off from losing the other.

As an example, I like Ice Cream. There are many different products on the market, but I have two particular brands that I eat more than any of the others. Breyers is a good brand, and can be purchased at most any supermarket where I live. The other brand that is particularly ...

Solution Summary

This 901 word solution provides three references to tie Managerial Economic concepts together in an understandable fashion. Within the text Marginal Rate of Substitution and Price Elasticity of Demand is covered thoroughly. Examples are given to help make the concepts more understandable.