Question
In: Economics
John buys and consumes only two goods, X and Y. At point A on the demand curve for X, quantity demanded is 2 when the price of X is $4 a unit.
John buys and consumes only two goods, X and Y. At point A on the demand curve for X, quantity demanded is 2 when the price of X is $4 a unit. At point B, quantity demanded is 3 at price of X equal to $2 a unit. . Marginal rate of substitution between X and Y at point A is equal to 2. (MRSxy =2). At point B, MRSxy will be:
15 | |
1.0 | |
0.50 | |
2.0 | |
None of the above. Not enough information to determine |
Solutions
Expert Solution
Because the quantity demanded of X lies on the demand function, the two choices are optimal which means at the choice is the marginal rate of substitution is equal to the price ratio
At A, MRS = Px / Py
2 = 4 / Py
Py = $2
This price will not change which means
At B
MRS = Px / Py
= 2/2
= 1.0
Therefore the marginal rate of substitution at point B is 1.0.
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