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A. Maria’s marginal rate of substitution of cupcakes (X) for apples (Y) equals 5/8. Explain the...

A. Maria’s marginal rate of substitution of cupcakes (X) for apples (Y) equals 5/8. Explain the meaning of this particular numerical value for Maria.

B. The demand for a product is Qd = 2776 – 75P. Calculate the price elasticity of demand at a price of $32 and explain the meaning of this particular numerical value.

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Answer #1

A..

Marginal rate of substitution tells that how much one good sacrifice for getting of Other good

MRS= MUx/MUy

If the value is 5/ 8 it means there are five cupcakes that are sacrificed for gaining 8 apples

B.

From the calculation it can be clearly seen the value of price elasticity of demand is 6.38

Hete the negative sign shows the inverse relationship between price and quantity demanded

so the price elasticity of demand is absolute value is greater than one

the demand is elastic

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