The first basic assumption of indifference theory is that the algebraic value of the MRS
between two goods is always negative.A negative MRS means that to increase consumption of one product,
Hugh is prepared to decrease consumption of a second product. The
negative value of the marginal rate of substitution is indicated graphically
by the negative slope of indifference curves.
Consider a case in which Hugh has a lot of clothing and only a little food.
Common sense suggests that he might be willing to give up quite a bit of
plentiful clothing to get one more unit of scarce food. It suggests as well
that if Hugh had little clothing and a lot of food he would be willing to
give up only a little scarce clothing to get one more unit of already
plentiful food.
This example illustrates the hypothesis of diminishing marginal rate of
substitution. The less of one product, A, and the more of a second
product, B, that the consumer has already, the smaller the amount of
that the consumer will be willing to give up to get one additional unit of
B. The hypothesis says that the marginal rate of substitution changes
when the amounts of two products consumed change. The graphical
expression of this hypothesis is that any indifference curve becomes
flatter as the consumer moves downward and to the right along the curve.
In Figure 6A-1 , a movement downward and to the right means that
Hugh is consuming less clothing and more food. The decreasing
steepness of the curve means that Hugh is willing to sacrifice less and less
clothing to get each additional unit of food. [ 11 ]