Question

George loves to eat desserts. He spends his entire allowance on pudding and pie. A bowl of pudding costs $1.50 and a piece of pecan pie costs $3. At his current consumption point, George's MRS of pie for pudding is 1.5. (This means that George is willing to trade 1.5 bowls of pudding for one piece of pie.) a. Does George's current market basket maximize his utility?S b. How should George's market basket change? Select.. c. When George's market basket maximizes his utility, what will his MRS of pie for pudding be? Select... Select..

Answer 1

Req a:
Marginal rate of substitution (MRS) = 1.5
Marginal rate of Exchnage for pie for pudding (MRE) = Price of pie/ Price of Pudding
					3/1.5 = 2
Here, MRS is nogt equal to MRE.
Therefore, Greorge is not at equilibrium i.e. his satsifaction is not maximum.
Req b:
The equilibrium will be reached when MRS will be 2
The same can be achieved by reducing the consumption of PIEe for pudding.
Req c.
MRS at maximizing point will be 2.00