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 substitution of good x for good y for Linda at her optimal bundle?

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Business

Israel Barber

12 November, 01:11

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 substitution of good x for good y for Linda at her optimal bundle?

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Greta Contreras · Answer 1

Answer: The marginal rate of substitution is 5

Explanation: Marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. The marginal rate of substitution for goods x for goods y is:

Price of goods (x) divided by price of goods (y). That is,

MRSxy = (Px / Py)

MRSxy = 25 / 5

MRSxy = 5.