If x₁is $20 bills and x₂is $100 bills, then: A)the utility function is x + 5z. B)indifference curves have many kinks. C)the marginal rate of substitution is 5. D)the marginal rate of substitution is 1/5.

Question

Quizplus · Accepted Answer

The marginal rate of substitution (MRS) is the amount of one good that a consumer is willing to give up in exchange for one unit of another good while remaining on the same indifference curve. In this case, the MRS is the ratio of the marginal utilities of x and z, which is (1/$20)/(1/$100) or 1/5. Therefore, the best choice is to trade $20 bills for $100 bills at a rate of 1/5, which will keep the consumer on the same indifference curve.

If X1 is $20 Bills and X2 is $100 Bills

If X₁is $20 Bills and X₂is $100 Bills