Question

Suppose a consumer with an income of $100 is faced with Px = 1 and Py = 1/2. What is the market rate of substitution between good X (horizontal axis) and good Y (vertical axis)? A. 0.50 B. -1.0 C. -2.0 D. -4.0

Answer 1

Answer:

The correct option is C. -2.0.

Explanation:

The Market Rate of Substitution can be described as the rate at which one good can be exchanged for another at current market prices.

Given:

Px = 1

Py = 1/2, or 0.5

The MRSxy which is market rate of substitution between good X (horizontal axis) and good Y (vertical axis) can be calculated as follows:

MRSxy = - Px / Py = - 1/ 0.5 = -2,0

Therefore, the correct option is C. -2.0.