Question

It is common for supermarkets to carry both generic (store-label) and brand-name (producer-label) varieties of sugar and other products. Many consumers view these products as perfect substitutes, meaning that consumers are always willing to substitute a constant proportion of the store brand for the producer brand. Consider a consumer who is always willing to substitute four pounds of a generic store-brand sugar for two pounds of a brand-name sugar. Do these preferences exhibit a diminishing marginal rate of substitution between store-brand and producer-brand sugar?

(Click to select)  Yes  No  

Assume that this consumer has $24 of income to spend on sugar, and the price of store-brand sugar is $1 per pound and the price of producer-brand sugar is $3 per pound. How much of each type of sugar will be purchased?

Producer-brand sugar:  pounds

Store-brand sugar:  pounds

If prices change such that the price of store-brand sugar was $2 per pound and the price of producer-brand sugar was $3 per pound, how much of each type of sugar will be purchased?

Producer-brand sugar:  pounds

Store-brand sugar:  pounds

Answer 1

• No

Explanation: the exhibit of store-brand sugar for four pounds and brand-name sugar of two pounds will not lead to diminishing marginal rate. Because most of the consumer prefers 4 pounds instead of to take 2 pounds irrelevant to the brand. So, there is no effect on marginal utility.

• Producer-brand sugar: 8 pounds.
• Store-brand sugar: 24 pounds

Explanation: In this scenario, the consumer prefers to take store-brand sugar instead of producer-brand sugar because of the difference in price. Store-brand sugar offers each pound $1 and the producer-brand sugar offers each pound $3. So, as per the consumer behavior prefers store-brand sugar and benefitted quantity of difference 16 pounds and price difference $2($3 - $1).

Especially, in this category most consumers prefer store-brand sugar due to the difference in quantity is more 16(24-8) pounds between producer-brand vs store-brand sugar.

• Producer-brand sugar: 8 pounds.
• Store-brand sugar: 12 pounds

Explanation: In this situation, the consumers choosing preference will vary due to the price may not much difference in between store-brand sugar is $2 per pound and producer-brand sugar is $3 per pound. The difference of amount is $1($3 - $2) in between store-brand sugar and producer-brand sugar and quantity of difference will get only 4 pounds (12 – 8). If the consumer prefers brand then they will go with producer-brand sugar of $3 per pound OR else the consumer go with store-brand sugar $2 per pound due to seeking for more quantity of sugar irrelevant to the brand.

Especially, in this category most consumers prefer produce-brand sugar due to the difference in price is less $1($3-$2) and getting good quality of a product.