Question

Jack has allocated $30 toward coffee and tea and feels that coffee and tea are perfect substitutes. Due to differences in caffeine levels, his MRS of tea for coffee equals two. If coffee and tea sell for the same price, Jack will Group of answer choicesa. spend all $30 on tea.
b. spend all $30 on coffee.

c. spend $20 on coffee and $10 on tea.

d. be indifferent between any bundle of coffee and tea costing $30.

Answer 1

Answer: C

C

Explanation:

MRS = 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 but at the same level of satisfaction or use.

The formula for calculating MRS is change in y divided by change in x.

MRS(x,y) = ΔY/ΔX

In the question the MRS of tea for coffee represents the amount of coffee that Jack has to give up to get one additional cup of tea while his level of consumption remains the same. The MRSxy = 2. That means Jack will give up two cups of coffee to gain one additional cup of tea.

Answer 2

Answer: C. spend $20 on coffee and $10 on tea

Explanation:

the marginal rate of substitution measures the amount of a good given up one for another good another good

MRS = change in good tea divided by change in good coffee

MRS = 2 meaning for cup of coffee 2 cups of tea are given up.

Jack allocates $30 towards coffee and tea, marginal rate of substitution implies that he gives up 2 cups of tea for coffee the ratio between coffee and tea is 2:1 and both products have the same price. We can conclude that he will spend $20 on coffee and $10 on tea. the combination of $20 for coffee and $10 for tea corresponds with jack's marginal rate of substitution of tea for coffee. for each dollar spent on tea jack spends $2 on coffee