Say a consumer is choosing between red wine and white wine. The price of red wine is 20 and the price of white wine is 10. If the marginal rate of substitution is 1, and if red wine is on the horizontal axis then the consumer is purchasing:
A)Too much red wine
B)Too much white 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 1 means the consumer is willing to give up 1 unit of white wine for 1 unit of red wine. However, since red wine is twice as expensive as white wine, the consumer should be consuming less red wine to maximize utility given the budget constraint.

Say a Consumer Is Choosing Between Red Wine and White