Question

Assuming that the prices of A and B are $1.50 and $1, respectively, and that Mr. Chen has $24 to spend, plot his budget line and identify the optimal combination of goods A and B that he will purchase.

Answer 1

consume 8 units of A and 12 units of B

Step-by-step explanation:

given data

prices of A = $1.50

prices of B = $1

Budget constraint = $24

consider data indifference curve

unit A unit B

16 6

12 8

8 12

4 24

solution

As graph, Mr. Chen will buy 8A and 12 B goods.

so Budget constraint is here express as

24 = 8 × $1.50 + 12 × 1.00

so here

MRS =
`(PB)/(PA)` rule of equilibrium

so here MRS is

MRS =
`(8)/(12)`

`(PB)/(PA)` =
`(1.00)/(1.50)` =
`(2)/(3)`

MRS =
`(PB)/(PA)` =
`(2)/(3)`