Figure 21-8

-Refer to Figure 21-8.If point B is the consumer's optimum and the price of chocolate chips is $4 per bag,what is the price of a bag of marshmallows
A)$1.50
B)$2.00
C)$3.00
D)$6.00

Question

Figure 21-8
 
-Refer to Figure 21-8.If point B is the consumer's optimum and the price of chocolate chips is $4 per bag,what is the price of a bag of marshmallows
A)$1.50 
B)$2.00 
C)$3.00 
D)$6.00

Quizplus · Accepted Answer

At the consumer's optimum, the slope of the budget line should be equal to the slope of the indifference curve.

Slope of the budget line = Price of chocolate chips / Price of marshmallows = 4/x

Slope of the indifference curve at point B = Marginal rate of substitution (MRS) = MU of chocolate chips / MU of marshmallows = 2/1 = 2

Equating the two slopes, we get:

4/x = 2
x = 2

Therefore, the price of a bag of marshmallows is $2.00.

The best choice for the consumer is to buy 3 bags of chocolate chips and 6 bags of marshmallows, as this combination lies on the highest possible indifference curve that is attainable within the consumer's budget constraint.

Figure 21-8 -Refer to Figure 21-8.If Point B Is the Consumer's Optimum