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.

1. For this consumer, what type of goods are merlot and pinot noir?

2. What is the consumer’s marginal rate of substitution of merlot for pinot noir?

3. 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.

Answer 1

1) For this particular consumer, merlot and pinot coir are substitute goods as consumer can substitute merlot to have an additional bottle of pinot coir.

2) Marginal rate of substitution of X (bottle of merlot) for Y(bottle of pinot coir) is 1/3. This is because the consumer can substitute 3 bottles of merlot to have an additional bottle of pinot coir.

MRS of X for Y = Change in good Y/ Change in good X = 1/3.

3) The consumer is willing to buy an additional bottle of pinot coir by sacrificing three bottles of merlot but only at a constant rate.

If the price of pinot coir is twice, then the consumer will not be willing to sacrifice 3 bottles of merlot for one bottle of pinot coir. The consumer would allocate his budget more for purchase of merlot and less for pinot coir because of higher price of pinot coir and having limited budget in hand.