Josephine buys 3 quarts of milk and 2 pounds of butter when milk sells for $2 a quart and butter sells for $1 a pound.Wilma buys 2 quarts of milk and 3 pounds of butter at the same prices.Josephine's marginal rate of substitution between milk and butter is greater than Wilma's.

Question

Quizplus · Accepted Answer

We can use the formula for the marginal rate of substitution (MRS) to compare Josephine's and Wilma's MRS:

MRS = (change in butter consumption)/(change in milk consumption)

For Josephine:

MRS = (1 pound)/(3 quarts/2) = 2/3

For Wilma:

MRS = (1 pound)/(2 quarts/2) = 1

Since Josephine's MRS is less than Wilma's, the statement is false.

Josephine Buys 3 Quarts of Milk and 2 Pounds of Butter