Homer’s Marginal Rate of Substitution for donuts and… beverages is MRS = - B/2D, , where...

Homer’s Marginal Rate of Substitution for donuts and… beverages is MRS = - B/2D, , where D is number of boxes of donuts and B is 40 oz. cans of… beverage. Homer has $300 to spend this semester on these two items. Each donut box (D) costs $10, and each can of beverage costs (B) $5.

Homer is currently consuming 20 donut boxes and 20 beverages this semester.

a) Graph Homer’s budget constraint, and show that this is a feasible bundle for Homer (on or inside his budget constraint). Put donuts on the x-axis.
b) Use the MRS and the slope of the budget constraint to show that Homer’s current consumption is not optimal. Draw an indifference curve through the current bundle that reflects the MRS you calculated and the suboptimality of the bundle. You don’t need a precise graph of the indifference curve as long as your graph captures the slope of the IC relative to the slope of the budget line. Lastly, propose a shift in consumption that will increase Homer’s utility. You don’t need to use specific numbers – based on your picture and/or the slopes, where are the bundles that Homer can afford that give higher utility?
c) Solve for Homer’s optimal bundle. Draw a new indifference curve in your graph that shows that this new bundle is optimal. Use the “equal slopes” condition to derive a condition on B and D at the optimal bundle, then plug that in to the budget constraint to find the specific bundle Homer can afford where this condition is true.

Expert Solution

Rahul Sunny answered 2 years ago

Consider the marginal rate of substitution (MRS) as it applies to Cletus, who consumes the 2...

Consider the marginal rate of substitution (MRS) as it applies to Cletus, who consumes the 2 goods x1 and x2. Assume in your answers below that MRS is always defined to be a negative number (given that both x1 and x2 are goods), and that x1 is on the horizontal axis and x2 is on the vertical axis. (4 points) How is the MRS defined, mathematically, in terms of the utility Cletus receives from x1 and x2? Be sure to...

There are two goods: food F and clothing C. MRS is the marginal rate of substitution,...

There are two goods: food F and clothing C. MRS is the marginal rate of substitution, and RPT is the rate of product transformation. a) in Fredonia in autarky, MRS=6F/C and in Sylvania in autarky MRS*=2F/C. Specify a trade which makes both countries better off. b) in Gargantua in autarky RPT=4F/C and in Lilliput in autarky RPT*=10F/C. Specify a reallocation of production across countries such that the output of both goods rise.

If marginal rate of substitution between wine and cheese is -1 and the marginal rate of...

If marginal rate of substitution between wine and cheese is -1 and the marginal rate of the product transformation between two goods is -2, what should be done in this economy to increase consumers’ utility? Support your answer by a graph.

assumption of diminishing marginal rate of substitution means that

1. The marginal rate of substitution is ________________ (Select all that apply)

1. The marginal rate of substitution is ________________ (Select all that apply)a. Equal to the slope of the budget line at an optimal point if the optimal point is not at a corner.b. How much of each good a consumer can afford.c. The amount of one good an individual would be willing to trade for a different good and be just as well off.d. The slope of the indifference curve.e. Equal to the price ratio at an optimal point if...

1.14. What are the relationships among marginal utilities, the marginal rate of substitution, and the slopes...

1.14. What are the relationships among marginal utilities, the marginal rate of substitution, and the slopes of indifference curves? 1.15. Explain how the assumption that "a larger basket of commodities is always preferred to a smaller one" implies (a) that indifference curves lying farther out from the origin are associated with higher utility values, (b) that marginal utilities are positive, and (c) that indifference curves are downward sloping.

Consider the utility function = . Find the marginal rate of substitution and show that the...

Consider the utility function = . Find the marginal rate of substitution and show that the utility function satisfies the property of diminishing marginal rate of substitution.

he marginal rate of substitution is the Group of answer choices rate at which the consumer...

he marginal rate of substitution is the Group of answer choices rate at which the consumer increases utility. tradeoff rate between the two goods under consideration at any particular point. total utility derived at any point. absolute value of the indifference curve.

(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...

what is the marginal rate of substitution, and what role does it play in determining the...

what is the marginal rate of substitution, and what role does it play in determining the consumer’s optimum choice?

Question