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

The market rate of substitution between good X and good Y is 2.

Step-by-step explanation:

The market rate of substitution between good X and good Y can be calculated by taking the ratio of the prices of the two goods. In this case, the price of good X (Px) is 1 and the price of good Y (Py) is 1/2. Therefore, the market rate of substitution is Px/Py = 1/(1/2) = 2.

Answer 2

The correct option is C. -2.0.

Step-by-step 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.