Question

Consider two market baskets, A ($100 worth of other goods, O, and 10 video rentals, V) and B ($150 worth of other goods and 10 video rentals). If video rentals are a normal good, will the consumer’s MRSVO be greater when basket A or bas- ket B is consumed? What if video rentals are an inferior good? Depict in a diagram.

Answer 1

Assuming price of other goods to be numeraire, i.e., $1.

Amount of other goods = 100 (for A) and 150 (for B) [where, amount = worth/price]

Now, MRS_VO means how much O should be sacrificed to obtain an additional unit of V.

MRS_VO = Quantity of V/ Quantity of O

For A, MRS_VO = 1/10

For B, MRS_VO = 1/15

Clearly, it is greater for A.

If video rentals are an inferior good, he would be willing to sacrifice a much higher amount of V for an additional unit of A, i.e., MRS_VO would be much lower.

In the graph, at point C, for an additional 50 units of O, the consumer is willing to sacrifice a huge amount of V, because of the inferiority of V.