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2. Hui orders pizza and burgers for lunch and dinner. When the price of pizza is $16 and the price of a burger is $8, he cons

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Answer #1

At the optimal consumption point the ratio of the marginal utilities of the two goods, which is also called marginal rate of substitution (MRS), is equal to the price ratio. Now, it is given that, when the price of pizza was $16 and price of burger was $8, the optimal consumption bundle of Hui was 6 pizzas and 8 burgers. So, one can say that the ratio of marginal utility of pizza (MUpizza) and marginal utility of burger (MUburger) is equal to the price ratio.

MUpizza/ MUburger = 16/8 = 2

Now, it is given that the price of pizza has declined to $12, so the price ratio changes to 12/8 = 3/2, while the MRS is equal to 2.

This means that Hui is willing to give up 2 unit of burger for 1 units of pizza, while in the market he can get 2 units of pizza by giving up 3 units of burger. Thus, the consumer would certainly be willing to give up some of burger in order to purchase a little more of pizza. So, the ratio of marginal utilities will decline.

Since, the quantity of burger consumed has declined from 8 to 5, after the price of pizza declined from $16 to $12, so one can say that pizza and burger are substitute goods.

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