In: Economics
(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.
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.