Question

A consumer's MRS is defined as the willingness to give up slices of pizza for cans of soda takes a value of 3. Meanwhile, soda is selling for exactly two times the price of pizza; the price ratio P (soda)/P(pizza) is equal to 2. What action should this consumer take to maximize utility ( satisfaction) and what assumption about consumer preferences supports your answer? Draw a graph to illustrate your answer.

Answer 1

must be MRS= Price ratio, ic MRS. equal to the price ratio. At that point the individual maximizes his/her consumption Hou, MRS. 3 and Priu ratio = 2 9. MRS & Price ratio e consomer is ready to give more units of pizza to buy one more unit of coda. Ho win keep giving up more pizza's Oftmal consumption point ie MRS = Pria ratt'o until he reaches the MRS Price ratio IC . Budget line tangent when the indifferenu uume is just to the budget line, the consumer reaches its optimal point MRs is the slope of indifference and Price ratio is the slope of the buget line. cwewe