Question

Marc has an income of $20 and spends it on two goods, root beer (measured on the vertical axis) and chips (measured on the horizontal axis). the price of root beer is $1 a can. the price of chips is $0.50 a bag. initially, marc chooses to consume 10 cans of root beer and 20 bags of chips. then the price of root beer rises to $1.50 per can and the price of chips falls to $0.25 a bag. Refer to Fact: Marc's initial marginal rate of substitution was:

A) equal to 2 cans of root beer given up for each bag of chips gained.
B) equal to 1 can of root beer given up for each bag of chips gained.
C) equal to 1/2 can of root beer given up for each bag of chips gained.
D) equal to 10 cans of root beer given up for each bag of chips gained.
E) not calculable with the information given.

Answer 1

Marc's initial marginal rate of substitution was equal to 1/2 can of root beer given up for each bag of chips gained.

Step-by-step explanation:

Given the information provided, we can calculate Marc's initial marginal rate of substitution. The marginal rate of substitution (MRS) is the rate at which a consumer is willing to trade one good for another while remaining on the same indifference curve.

Initially, Marc consumes 10 cans of root beer and 20 bags of chips. The price of root beer is $1 per can, and the price of chips is $0.50 per bag.

To calculate the MRS, we compare the change in the quantity of root beer (ΔRoot Beer) to the change in the quantity of chips (ΔChips).

MRS = ΔRoot Beer / ΔChips = (10 - 0) / (0 - 20) = 10 / -20 = -1/2

Therefore, Marc's initial marginal rate of substitution was equal to 1/2 can of root beer given up for each bag of chips gained. So, the correct answer is C) equal to 1/2 can of root beer given up for each bag of chips gained.