The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be:
A) 2 lemonades for each popcorn.
B) 1 lemonades for each popcorn.
C) 1/2 lemonade for each popcorn.
D) indeterminate unless more information on Fred's marginal utilities is provided.

Question

Quizplus · Accepted Answer

The marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. In this case, since the price of lemonade is $0.50 and the price of popcorn is $1.00, Fred would need to give up 2 lemonades (worth $1.00 in total) to afford 1 popcorn, assuming he has maximized his utility and the prices reflect his marginal utilities.

The Price of Lemonade Is $0