Linda consumes two goods: x and y, has preferences that are smooth and maximizers are always interior, and income W=$150. If px=$25 and py=$5, what is the marginal rate of transformation of y into x (MRTxy) at her optimal bundle?

a. - 1/2

b. - 5

c. 1/5

d. - 3

e. 7/2

Marginal rate of transformation = - 5

Explanation:

Marginal rate of transformation is the rate at which one good can be transformed into another in a 2 product economy given a certain amount of resources.

We are asked to calculate marginal rate of transformation of y into x.

The formula we will use is

Marginal rate by transformation = (change in Y) / change in x

Income = $150

Price of x = $25

Price of y = $5

If we were to produce only x from income we will have = 150/25 = 6

If we were to produce only y from income = 150/5 = 30

To gain 30 units of y we will have to forgo 6 units of x

Marginal rate of transformation = 30/-6

Marginal rate of transformation = - 5