What Does the Marginal Rate of Substitution Have to Do

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The Answer is In order for an allocation to be efficient, the indifference curves of the agents at the point of that allocation must be tangent to each other. To help understand why efficient trades require indifference curves that are tangent, remember that the slope of an agent's indifference curve at any point measures the marginal rate of substitution for that agent of goods 1 and 2. When the indifference curves for two agents are tangent, these marginal rates of substitution are equal for both agents. Now suppose that the marginal rates of substitution for two agents are not equal. Then the existing allocation cannot be efficient because we will be able to find another allocation that makes both agents better off or one agent better off and the other no worse off.

What Does the Marginal Rate of Substitution Have to Do

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