(c) Obtain the Marginal Rate of Substitution between Butter and Sour Cream. What would happen to the MRS if Matt doubles his consumption of Butter and Sour Cream?
Question
(c) Obtain the Marginal Rate of Substitution between Butter and Sour Cream. What would happen to the MRS if Matt doubles his consumption of Butter and Sour Cream?
Solution
The Marginal Rate of Substitution (MRS) is the rate at which a consumer is willing to give up one good in exchange for another good while maintaining the same level of utility. In this case, it's the rate at which Matt is willing to give up Sour Cream (S) for Butter (B).
Given Matt's utility function u(B, S) = βB + S, the marginal utility of Butter (MU_B) is β and the marginal utility of Sour Cream (MU_S) is 1.
The MRS is calculated as the ratio of the marginal utilities, which is MU_B/MU_S = β/1 = β.
So, the Marginal Rate of Substitution between Butter and Sour Cream is β.
If Matt doubles his consumption of Butter and Sour Cream, it won't affect the MRS. This is because the MRS is determined by the ratio of the marginal utilities, which are constants in this case. They do not depend on the quantity of Butter and Sour Cream consumed. Therefore, even if Matt doubles his consumption of both goods, the MRS will remain the same, at β.
Similar Questions
Matt considers Butter (B) and Sour Cream (S) as substitutes. His utility function has the form u(B, S) = βB + S, where β > 0. Suppose the price of Butter is PB = 3, the price of Sour Cream is PS = 2, and Matt has an income of M = 100 dollars to spend between Butter and Sour Cream. (a) In a well-labeled diagram, draw Matt's indifference map, putting Butter in the x-axis and Sour Cream in the y-axis. Make sure to indicate the direction in which the indifference curves increase.
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Question 4A decrease in the price of butter will _________ the demand for margarine, a substitute for butter.1 pointNot changeWe can’t sayIncreaseDecrease
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