Suppose that soup is measured on the horizontal axis and bread is measured on the vertical axis.At an interior solution: A) MRS_SB = P_S/P_B. B) MRS_SB = - P_S/P_B. C) MRS_SB = P_B/P_S. D) MRS_SB = - P_B/P_S.

Question

Quizplus · Accepted Answer

MRS_SB is the marginal rate of substitution of soup for bread, which is equal to the negative of the slope of the indifference curve at that point. At an interior solution, the indifference curve is tangent to the budget line, which means that the slope of the indifference curve is equal to the negative of the slope of the budget line. The slope of the budget line is equal to the ratio of the prices of the two goods, so the MRS_SB is equal to the ratio of the prices of the two goods.

Suppose That Soup Is Measured on the Horizontal Axis and Bread