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
A)too much cheese.
B)too much wine.
C)just the right amount of both goods.
D)purchasing more than what her income would allow.

Question

Quizplus · Accepted Answer

The marginal rate of substitution (MRS) of 4 means the consumer is willing to give up 4 units of cheese for 1 unit of wine. Since the price ratio (Pw/Pc) is 2 (10/5), the consumer is giving up too much cheese relative to the price ratio, indicating they are consuming too much cheese.

Say a Consumer Is Choosing Between Wine and Cheese