Say a consumer is choosing between wine and cheese.The price of wine is 10 and the price of cheese is 5.If the marginal rate of substitution is 4, and if wine is on the horizontal axis and cheese is on the vertical axis then the consumer is purchasing:

Question

Quizplus · Accepted Answer

The marginal rate of substitution (MRS) is the rate at which the consumer is willing to substitute one good for the other while remaining equally satisfied. In this case, the MRS is 4, which means that the consumer is willing to give up 4 units of cheese for one unit of wine. However, if the price of wine is higher than the price of cheese, the consumer should be willing to purchase more cheese for the same amount spent on wine. Since the price of wine is higher than the price of cheese, it implies that the consumer is currently purchasing more wine than cheese, which means that she is giving up more cheese than she really wants to. Therefore, the consumer is purchasing too much cheese.

Say a Consumer Is Choosing Between Wine and Cheese