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Siobhan has certain preferences for food and clothing. The price of food is €20 per pound...

Siobhan has certain preferences for food and clothing. The price of food is €20 per pound and the price of clothing is €10 per garment. At these prices, Siobhan consumes 5 pounds of food and 10 garments per month. These are the only things that Siobhan buys. Her preferences satisfy all the standard assumptions of consumer choice theory. What is Siobhan's marginal rate of substitution at the bundle that she chooses? Your answer should be in the form of the number of garments that Siobhan is willing to give up for an extra pound of food.

A. 2

B. 1

C. 10

D. None of the above

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Answer #1

Answer

Option A. 2

Siobhan is willing to give up 2 units of garment for an extra pound of food

Px=Price of food per pound

Py=Price of cloth per garment unit

MRSxy=Price of x / Price of y

20/10=2

MRS xy = 2

It suggest that for one additional unit of x(food) the consumer is willing to give up 2 units of y(Clothing)

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