Question

Fred has budgeted $21 for a restaurant supper. He has a big appetite, so his budget is the only limit to how much he can order. The restaurant sells only steak ($21 each) or hamburger ($7 each). Fred is equally happy with 2 hamburgers or 1 steak. Please answer the 4 questions below, in order:

1) What is Fred's marginal rate of substitution of steak for hamburger? (Express as one number with one decimal place.)

2) At Fred's point of consumer equilibrium, how many hamburgers will he consume? (Express as whole number.)

3) At Fred's point of consumer equilibrium, how many steaks will he consume? (Express as whole number.)

4) What is the economic term for the relationship between steak and hamburger for a consumer like Fred?

Answer 1

1. Fred's Marginal rate of substitution is 2. As two hamburgers must be given up in order to consume one steak.

2. Fred consumes 3 hamburgers.

3. Fred consumes 0 steaks.

4. Steak and Hamburger are substitute goods for Fred.

Reason-

Utility function= 2H+S

Budget constraint:

21= 21S+7H

So either hamburger will be consumed or steak will be consumed.

When only steak is consumed

Utility= 2*0+1=1

When only hamburger is consumed

Utility= 2*3+0=6

So only 3 Hamburger will be consumed and no steak. As it gives more utility.