The graph shows Tom’s budget line and indifference curve for good x and y. The price...
The graph shows Tom’s budget line and indifference curve for good x and y. The price of good x is $40 . If he uses all of his income on good Y , then 20 units of y will be consumed. If all income is spent on good x then 4 units will be consumed. What is the marginal rate of substitution of good y for x at the point where the indifference curve is tangent to the budget line?
Homework Answers
Ans:
We have:
Price of good X = 40
If all income is spend on good X then 4 units can be consumed.
So, total income = 40 X 4 = 160.
If all income is spent on Y, then 20 units can be consumed.
Price of Good Y = 160 / 20 = 8.
Budget: 40X + 8Y = 160.
Optimal point (equilibrium: Budget is tangent to IC):
MRS (slope of budget line) = Slope of IC.
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