Johnny has allocated $30 toward coffee and tea and feels that coffee and tea are perfect substitutes.Due to differences in caffeine levels,his MRS of tea for coffee equals two.If coffee and tea sell for the same price,Johnny will
A)spend all $30 on tea.
B)spend all $30 on coffee.
C)spend $20 on coffee and $10 on tea.
D)be indifferent between any bundle of coffee and tea costing $30.

Question

Quizplus · Accepted Answer

Since Johnny's MRS of tea for coffee is 2, he values coffee twice as much as tea. If both are priced the same, he will spend all his money on coffee to maximize his utility.

Johnny Has Allocated $30 Toward Coffee and Tea and Feels