Question

The price of lemonade is​ $0.50; the price of popcorn is​ $1.00. If Fred has maximized his utility by purchasing lemonade and​ popcorn, his marginal rate of substitution will be

A. 2 lemonades for each popcorn.
B. ​1/2 lemonade for each popcorn.
C. 1 lemonade for each popcorn.
D. indeterminate unless more information on​ Fred's marginal utilities is provided.

Answer 1

Answer:

Option (A) is correct.

Explanation:

Let good 1 is popcorn and good 2 is lemonade.

Therefore, at the optimal level the marginal rate of substitution is equal to the ratio of marginal utilities of two goods and the price ratio of two goods.

MRS = (MU1 ÷ MU2) = (P1 ÷ P2) = (1 ÷ 0.5)

                                                   = 2

Hence, his marginal rate of substitution will be 2 Lemonades for each popcorn.

Answer 2

If Fred has maximized his utility by purchasing lemonade and​ popcorn, his marginal rate of substitution will be: A. 2 lemonades for each popcorn.

Using this formula

Marginal rate=Price of popcorn/Price of lemonade

Where:

Price of popcorn=$1.00

Price of lemonade=$0.50

Let plug in the formula

Marginal rate of substitution=1/0.5

Marginal rate of substitution=2

Inconclusion if Fred has maximized his utility by purchasing lemonade and​ popcorn, his marginal rate of substitution will be: A. 2 lemonades for each popcorn.

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