Question

Answer the following problem on Indifference Curves that we discussed in class:

The following table shows a student’s indifference schedule for buying bags of candy at Costco. Good A is represented by bags of Miniature Snickers Bars, and good B is represented by bags of individual Starbursts. The price of good A is $1.50 and the price of good B is $2.00.

Units of Good A	Units of Good B
16	6
12	8
8	12
4	24

Suppose this student’s income is $24 per month on candy. Using the price information above, plot this student’s budget line.

Now, assume the price of good B decreases to $1.00. How many bags of starbursts can you now purchase? Show this amount on your budget line.

Graph the student's indifference curve by using the table above.

What is the equilibrium position in this example?

What does the marginal rate of substitution represent for the student?

Answer 1

When price of B decreases to $1,you can buy M/Pb=24/1=24 Bs.

Equilibrium position-8A and 12 B.

Marginal rate of substitution refers to the amount of good B the consumer is willing to substitute for an additional unit of good A.