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MRS a
MRS a. utility mazIrnixation
Erlc ilves In Montreal a. loves to eat desserts. He spends his entire weekly allowance on yogurt and pie. A bowl of yogurt is pnced at $1.75, and a piece of pecan pie is pnced $7.00. At his current consumptlon polnt, Erles marginal raM of substitution (MRS) of yogurt for pie Is 0. Thls means that EMc Is willing to trade four bowls of yogurt per week for one plece of pie per week.
Does Erles current bun. maximize his utillty—in otIler words, make him as well off as possIble? If not, how should he change it to maxlmIze his 11114?
ErIc could increase his utility by buying more yogurt and les Pb Pb? week. 0 Erles current bundle maximizes his utillty, and he should keep it unchanged. 0 ErIc could increase his utility by buying less yogurt a. more ple per week.
Expert Solution
Market Rate of Exchange of Pudding for Pie= (Ppie / Ppudding)
= $7.00/$1.75
= 4.00
Marginal Rate of Substitution (MRS) of Pudding for Pie = 4
Since MRS = (Ppie / Ppudding)
4 = 4
So,
Eric's current bundle maximizes his utility and he should keep it unchanged.
The correct option is 2nd "Eric's current bundle maximizes his utility and he should keep it unchanged".
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