Asked by Sophie Hansen on Jun 16, 2024
Verified
Refer to Scenario 16.2. What is Sally's marginal rate of substitution of tee shirts for candy at the current distribution?
A) 7/2
B) 2
C) 1/2
D) It is impossible to determine without the prices of each commodity.
Marginal Rate
Often refers to the additional rate of tax that applies to each extra dollar of income or the additional rate of return.
Candy
Sweet confections made from sugar and other ingredients, popular as a treat or snack.
- Grasp the essence of marginal utility and its effect on the trade-off rate between goods at the margin.
- Establish and tally marginal rates of substitution in the quest for maximizing utility.
Verified Answer
SM
Shelby MinkyJun 19, 2024
Final Answer :
B
Explanation :
Sally's marginal rate of substitution of tee shirts for candy is found by dividing her marginal utility of tee shirts by her marginal utility of candy at the current distribution. So, MRS = MU(Tee shirts) / MU(Candy) = 18/8 = 2. Since this is a decreasing slope, Sally is willing to give up 2 candies in exchange for 1 more tee shirt.
Based on the current distribution, Sally should trade 1 candy for 1 more tee shirt and her overall utility will increase.
Based on the current distribution, Sally should trade 1 candy for 1 more tee shirt and her overall utility will increase.
Learning Objectives
- Grasp the essence of marginal utility and its effect on the trade-off rate between goods at the margin.
- Establish and tally marginal rates of substitution in the quest for maximizing utility.
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