Question

In: Economics

(A) An individual's marginal rate of substitution is 3 slices of pizza for 2 beers at...

(A) An individual's marginal rate of substitution is 3 slices of pizza for 2 beers at the present bundle of beer and pizza she is consuming the price of beer is $4.00 and the price of a slice of pizza is $2.50.

(B) An individual's marginal rate of substitution is 4 slices of pizza for 3 beers at the present bundle of beer and pizza she is consuming. The price of beer is $5.00 and the price of a slice of pizza is $4.00.

(c) An individual's marginal rate of substitution is 3 slices of pizza for 1 beer at the present bundle of beer and pizza she is consuming. The price of beer is $7.50 and the price of a slice of pizza is $2.50.

Match with the following options, the one that suits best:

1)She should not change her current consumption levels of beer and pizza.

2)she should consume more beer and less pizza.

3)she should consume more pizza and less beer.

Solutions

Expert Solution

Solution :

Option A : 3) She should consume more pizza and less beer.

Reason : Cost of 3 Slice of Pizza : 3 × $2.50 = $7.50

Cost of 2 Cans of Beer : 2 × $4.00 = $8.00

MRS = 2 Cans of Beer for 3 Slices of Pizza, it means that 2 Cans of Beer will give the same utility as 3 Slices of Pizza. Since, cost of pizza is lesser, she should consume more pizza and less of beer.

Option B : 2) She should consume more beer and lesser pizza.

Reason : Cost of Pizza : $4 × 4 = $16.00

Cost of Beer : $5.00 × 5 = $15.00

Since, 4 slices of pizza and 3 cans of beer give the same utility when exchanging them, and the cost of Beer is lower, whe should consume more beer and lesser pizza.

Option C : 1) She should not change her current consumption of beer and pizza.

Reason : Cost of Pizza : $2.50 × 3 = $7.50

Cost of Beer : $7.50 × 1 = $7.50

Since 3 slices of pizza provides the same utility as 1 can of beer, there is no point in changing the quantities if they both cost the same as well. Hence, she should not change her consumption of beer and pizza.


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