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

Answer:

consume 8 units of A and 12 units of B

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 = $\frac{PB}{PA}$  rule  of equilibrium

so here MRS is

MRS = $\frac{8}{12}$      

$\frac{PB}{PA}$ =  $\frac{1.00}{1.50}$ = $\frac{2}{3}$  

MRS = $\frac{PB}{PA}$ = $\frac{2}{3}$