Answer to Question #50715 in Microeconomics for Tatenda
a) What is the equation for her budget line? Draw it (with T on the vertical axis), and label the slope and intercepts.
b) What is Linda’s marginal rate of substitution? Explain.
c) Solve mathematically for her optimal bundle.
d) Show how to determine this bundle in a
diagram using indifference curves and a budget line.
a) The equation for her budget line is:
Pt*T + PS*S = B
50T + 50S = 500
b) The marginal rate of substitution is the rate at which a consumer is
ready to give up one good in exchange for another good while maintaining
the same level of utility.
Linda’s marginal rate of substitution is MRS = MUs/MUt = 2/2 = 1
c) Her optimal bundle is in the point of intersection of budget line and
indifference curve. In our case, as MRS = 1, so at this point S = T, so
50T + 50T = 500 and T = S = 5 units.
d) To determine this bundle graphically, we should find the point (or
points), where the budget line intersects with indifference curves.
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