Consumers in Georgia pay twice as much for avocados as they do for peaches. However, avocados and peaches are equally priced in California. If consumers in both states maximize utility, will the marginal rate of substitution of peaches for avocados be the same for consumers in both states? If not, which will be higher??
Marginal rate of substitution of peach for avocado is the rate at which a customer is ready to give up avocado for an additional amount of peach, while retaining same utility.
Given-
In Georgia,
In California,
At maximum utility point marginal rate of substitution (MRS) is equal to price ratio. In other words
In Georgia,
In California,
Marginal rate of substitution is different in both the states. The marginal rate of substitution in California is higher than in Georgia.
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