Question

1) State something you have a set budget for per week or per month.

         a) Do you ever go over your budget? If so, why?

         b) Are you ever under budget? If so, why?

         c) If your income increases, would it effect your budget? How?

2) State two goods you like to purchase together. (Example: pizza and pop)

         a) What is the marginal rate of substitution for these goods?

         b) Does your marginal rate of substitution change if you are already consuming large amounts of one of those goods? If so, why?

Answer 1

1.

People usually set a budget for food/ recreation such as movie per week or month.

• a) If the consumer plan to have three restaurant meals per week with a set budget and she indulges and buy another restaurant meal, this makes her go over budget for the week or month on food. The same goes for recreation as well.
• b) If the consumer somehow fell sick or the weather is not suitable for an outing, the consumer can cook food home and may take less than planned restaurant meals per week or month.
• c) If the income of the consumer increases, it inevitably affects the budget for food or recreation as well, because in the case of rational behavior regarding utility more is always better than less.

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2.

Two goods people usually bought together is coffee and sugar, or bread and butter. These goods are said to be complements and consumed jointly in a fixed proportion.

• a) The marginal rate of substitution for perfect substitutes is zero. Because the consumer use them in fixed percentage and there exists no change between these fixed quantities.
• b) If the consumer consumes a large amount of one good, she will consume a large amount of another good as well. This will increase its utility but not alter the proportion by which they are consumed neither the rate of substitution.