Question

A particular consumer of red wine is always willing to substitute between bottles of merlot and bottles of pinot noir at a constant rate of three bottles of merlot (commodity x) for one bottle of pinot noir (commodity y) and vice versa. 8. For this consumer, what type of goods are merlot and pinot noir? (1 point) 9. What is the consumer’s marginal rate of substitution of merlot for pinot noir? (2 points) 10. If the price of pinot noir were twice the price of merlot, how would this consumer allocate his wine budget between the two types of wines? Explain. (2 points)

Answer 1

It is given that the consumer is willing to substitute 3 bottles of X for one bottle of Y. This implies that U = X + 3Y.

8) the two goods are perfect substitute because the consumer can substitute one good for the other. They are not consumed together but they can be replaced by each other

9) marginal rate of substitution of X for Y is -MUX/MUY. Therefore in this case it is - 1/3

10) the price ratio is PX/PY = 1/2 and this is greater than the marginal rate of substitution in absolute terms. This indicates that for the consumer Y give the more additional utility and the consumer is going to spend all the money on commodity Y. Consumer will not purchase any unit of X.