Magnetotelluric (MT) response is studied for a vertically inhomogeneous earth, where conductivity (or resistivity) varies exponentially with depth as σ(z) = σ1exp(pz). Horizontal electric and magnetic fields in such an inhomogeneous medium are given in terms of modified Bessel functions. Impedance and apparent resistivity are calculated for (1) an inhomogeneous half-space having conductivity varying exponentially with depth, (2) an inhomogeneous half-space overlain by a homogeneous layer, and (3) a three-layer model with the second layer as an inhomogeneous or transitional layer. Results are presented graphically and are compared with those of homogeneous multilayer models. In the case of resistivity increasing exponentially with depth, the results of the above inhomogeneous models are equivalent to those of Cagniard two-layer models, with h1c = h1 + |1/p|. In the case of resistivity decreasing exponentially with depth, the homogeneous multilayer approximation depends upon the number of layers and the layer parameters chosen; |Z/ωμ| as a function of frequency is more useful than the apparent resistivity in determining the values of p and h1.