Scenario 16.3:
Sam and Sally are the only consumers in an economy where tee shirts and candy are the only commodities that are consumed. The marginal utility schedule for each appears below.
Sam tee shirts MU(tee shirts) Candy MU(Candy)
1 10 1 6
2 9 2 5
3 8 3 4
4 7 4 5
5 6 5 4
Sally tee shirts MU(tee shirts) Candy MU(Candy)
1 24 1 12
2 19 2 9
3 18 3 8
4 14 4 7
5 10 5 3
There are 7 candies and 7 tee shirts total in the economy.
Consider the case when the goods are redistributed such that Sam has 4 tee shirts and 4 candies. Sally has 3 tee shirts and 3 candies.
-Refer to Scenario 16.3. What is Sam's marginal rate of substitution of tee shirts for candy at the current distribution?
A) 2
B) 7/5
C) 5/7
D) It is impossible to determine without the prices of each commodity.

Question

Quizplus · Accepted Answer

To find Sam's marginal rate of substitution, we need to look at the ratio of the marginal utilities of tee shirts and candy at the current distribution. At 4 tee shirts and 4 candies, Sam's MU(tee shirts) is 7 and his MU(candy) is 5. So his MRS is 7/5.

Scenario 16.3: Sam and Sally Are the Only Consumers in an Economy