Question

9/13 Question 3: (30 points) 3.1) (10 points) Jin buys only Timbits (T) and Donuts (D) at Tim Hortons. He views Donuts and Timbits as perfect substitutes. For him, one Donut would give him the same satisfaction as eight Timbits would 3.1a) (4 points) What is his marginal rate of substitution of Donuts for Timbits (MRSTD)? Draw Jin's indifference curve. • MRSTD

Please answer all the four sub parts

everything is in the question

Answer 1

3.1.a. Donuts and Timbits are perfect substitutes. 1 donut gives same satisfaction as 8 timbits.

Then, the indifference curve will be linear and downward sloping as :

Donuts 2 Indifference cur Timbits 16

Now, Marginal rate of substitution MRS_TD = -number of donuts / number of timbits

or, MRS_TD = - 1/8

or, MRS_TD = -0.125

MRS_TD is the slope of the indifference curve.

3.1.b. Jim's utility function U(T,D) = T + 8D (as 1 donut gives same satisfaction as 8 timbits)

3.1.c. If price of timbit is $0.15 per unit and price of donut is $2 per unit. Jim has $3 to spend.

then, equation of the budget line will be P_T*T + P_D*D = 3

or, 0.15T+2D = 3

Then, slope of the budget line = - 2/0.15 = 13.33

As the slope of budget line is steeper than indifference curve, Jim will only buy timbits.

Thus, Jim will buy $3/$0.15 = 20 timbits and 0 donuts.