Question

Suppose you don't know anything specic about Kate and Antonio's preferences. You

do know, however, that they were given a chance to swap eight M&Ms for ve Starburst,

and they both voluntarily agreed to this swap.

(a). What can you say about Kate's MRS for Starburst with M&Ms? (Assume that

these rates of substitution don't depend on the amounts consumed.)

(b). What can you say about Antonio's MRS for Starburst with M&Ms? (Assume

that these rates of substitution don't depend on the amounts consumed.)

Answer 1

From the information we believe that both of them had a preference ranking where bundles of goods were ranked according to their preferences. When they were given a chance to swap eight M&Ms for five Starburst, they both voluntarily agreed to this swap. This implies that the rate of substitution is -8/5 because both of them substituted 8 units of M&Ms to het 5 units of Starburst. MRS also indicates the rate of substitution that is voluntarily agreed upon by the consumers. Hence both have a MRS of -8/5