Problem #1: A consumer can spend her entire income on two goods X and Y. The following consumption bundles (A, B, C, D, E) give the same level of satisfaction (utility) to the consumer. In economics, we say that the consumer is indifferent among the consumption bundles A, B, C, D and E.
Bundles Good Y Good X A 120 20 B 80 25 C 50 30
D 30 35 E 20 40 1. Determine the marginal rate of substitution between goods X and Y, when the consumer moves from point A to point B. Let's call it MRSA. What's the interpretation of MRSA? 2. Determine the marginal rate of substitution between goods X and Y, when the consumer moves from point B to point C. Let's call it MRS. What's the interpretation of MRS? 3. Determine the marginal rate of substitution between goods X and Y, when the consumer moves from point C to point D. Let's call it MRS. What's the interpretation of MRS? 4. Determine the marginal rate of substitution between goods X and Y, when the consumer moves from point D to point E. Let's call it MRSE. What's the interpretation of MRS? 5. Recap: what do you observe in the value of the marginal rate of substitution as the consumer moves from A to B, B to C, C to D, and D to E? What terms do we use to characterize such situation in economics? D