Question

Lisa consumes only pizzas and burritos. In equilibrium, her marginal utility of pizza is 16 and her marginal utility of a burrito is 8. The price of a pizza is $3. Instructions:

Round your answer to 2 decimal places.

what is the price of a burrito? .

Answer 1

It is provided in the problem that Liza consumes only two goods, pizzas and burritos. Let pizza be denoted by X with price P_x and utility U_x and burrito be denoted by Y with price P_y and utility U_y.
The marginal rate of substitution represents the rate at which a consumer is willing to substitute one good for another. This is equal to the ratio of the utilities of two goods. On the other hand, the marginal rate of transformation represents the rate at which a consumer can trade the money income for the two goods. This is equal to the ratio of prices of two goods.
According to the Consumer's Constrained Choice concept, the maximization of the utility of a consumer happens when the consumer can trade the money income at an equal rate where the goods can be substituted. This means that at MRS equal to MRT, the equilibrium happens. That is, the ratio of utilities is equal to the ratio of their prices. Thus,

MRT = MRS

Substituting the values in the above equation,

, and

Thus, is equal to

Hence, the price of a burrito equals $1.50.