Hailey's income is $40 per week.She spends all of it on coffee (C)and doughnuts (D).Coffee costs $2 per cup and doughnuts cost $1 each.Her marginal rate of substitution for coffee with doughnuts is D/C.How many cups of coffee and how many doughnuts will she purchase each week?
A) 15 cups of coffee and 10 doughnuts
B) 10 cups of coffee and 20 doughnuts
C) 20 cups of coffee and 10 doughnuts
D) 5 cups of coffee and 30 doughnuts

Question

Quizplus · Accepted Answer

Hailey's budget constraint is 2C + D = 40. The marginal rate of substitution (MRS) is D/C, which should equal the price ratio of coffee to doughnuts (2/1 = 2) for optimal consumption. Solving 2C + D = 40 and D/C = 2 gives C = 10 and D = 20.

Hailey's Income Is $40 Per Week