Mrs. Rochester earns $4500 a week and spends her entire income on computers and pastries, since these are the only two items that provide her utility. Furthermore, a) Draw an indifference curve showing the optimum choice. Label the optimum as point A. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution. b) What would be the new marginal rate of substitution that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution. c) Assume for this question only that when the price of computers decreases, less of that good is demanded. Illustrate the income and substitution effect of this price decrease.
Mrs. Rochester earns $4500 a week and spends her entire income on computers and
pastries, since these are the only two items that provide her utility. Furthermore,
a) Draw an indifference curve showing the optimum choice. Label the optimum as
point A. What would be the marginal rate of substitution at the point that
corresponds to the optimal consumption choice? Interpret the marginal rate of
substitution.
b) What would be the new marginal rate of substitution that corresponds to the
optimal consumption choice? Interpret the marginal rate of substitution.
c) Assume for this question only that when the price of computers decreases, less of
that good is demanded. Illustrate the income and substitution effect of this price
decrease.
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