Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences satisfy all of the basic assumptions, buys 5 pens and one pencil each semester. With this consumption bundle, his MRS of pencils for pens is 3. Which of the following is true?

Question

Quizplus · Accepted Answer

Since Jack's MRS of pencils for pens is 3, he is willing to give up 3 pencils for 1 pen. This means that he values pens more than pencils. However, he is currently buying more pens than pencils. Therefore, he can increase his utility by buying more pencils and fewer pens to get closer to his optimal consumption bundle. Option A is incorrect because buying more pens and fewer pencils would move him further away from his optimal consumption bundle since he values pencils less. Option C is incorrect because buying more of both goods would only be optimal if their MRS was equal, which is not the case here. Option D is incorrect for similar reasons. Option E is incorrect because his optimal consumption bundle may involve buying a combination of both goods that is not a corner solution.

Pencils Sell for 10 Cents and Pens Sell for 50