Suppose a consumer with an income of $100 is faced with P_x = 1 and P_y = 1/2.What is the market rate of substitution between good X (horizontal axis)and good Y (vertical axis)? A) 0.50 B) -1.0 C) -2.0 D) -4.0

Question

Quizplus · Accepted Answer

The market rate of substitution (MRS) between two goods is the ratio of the marginal utilities of one good to the marginal utility of the other good. In this case, MRS = MUx/MUy = P_x/P_y = 1/2. This means that in order to acquire one more unit of good X, the consumer is willing to give up 2 units of good Y. Therefore, the correct answer is C. As for the best choice, it depends on the prices of the goods and the consumer's income. We don't have enough information to determine that in this question.

Suppose a Consumer with an Income of $100 Is Faced