Question

2) If Joe views two candy bars and one piece of cake as perfect substitutes, what...

2) If Joe views two candy bars and one piece of cake as perfect substitutes, what is his marginal rate of substitution between candy bars and cake?

Homework Answers

Answer #1
  • Marginal rate of substitution is the amount of a good that a consumer gets equal utility from and thus is willing to give up inorder to obtain the other good.
  • If the two goods are perfect substitutes, the consumer will be Indifferent to the consumption of any good from the two.
  • Joe views two candy bars and one piece of cake as perfect substitutes.
  • Therefore he is indifferent to the consumption of either candy bars or one piece of cake.
  • Now let us consucon a utility function U(X,Y). If X is the amount of goods consumed of a first good then Y is the amount of good consumed of a second good.
  • Let X=1( cake) and Y=2(candy bars). Then the MRS chooses the minimum value among the both as min(X,Y)=min(1,2) = 1
  • Hence the MRS is two candy bars for one cake.
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