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11 January, 01:57

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.

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Answers (1)
  1. 11 January, 03:46
    0
    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.
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