Marginal Rate of Substitution a. Consumers in Georgia pay twice as much for avoc
ID: 1114399 • Letter: M
Question
Marginal Rate of Substitution
a. Consumers in Georgia pay twice as much for avocados as they do for peaches. However, avocados and peaches are the same price in California. If consumers in both states maximize utility, will the marginal rate of substitution of peaches for avocados be the same for consumers in both states? If not, which will be higher?
b. Assume Carolyn is given a bundle on her budget constraint where her MRSFC = 2. Also assume the price of a unit of food equals $3 and the price of a unit of clothes equals $6. Should Carolyn buy more food or more clothes to maximize her utility? Why? Explain in detail.
Explanation / Answer
A) If prices are same then MrS should be same in both coubtries because for maximising utility MRS=Px/PY
Thus MRS for Georgia and California is same
B) MRSFC=2 and PF=3 and Pc=6
Carolyn is maximising the utility because for maximising utility MRS=Pc/Pf
Which Carolyn is already consuming. Thus utility is maximised.