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Understanding MRS
#cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-3-utility-theory #study-session-4

Tom Warren currently has 50 blueberries and 20 peanuts. His marginal rate of substitution of peanuts for blueberries, MRSpb equals 4, and his indifference curves are strictly convex.

Determine whether Warren would be willing to trade at the rate of 3 of his blueberries in exchange for 1 more peanut.

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Solution

MRSpb = 4 means that Warren would be willing to give up 4 blueberries for 1 peanut, at that point. He clearly would be willing to give up blueberries at a rate less than that, namely, 3-to-1.

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3. UTILITY THEORY: MODELING PREFERENCES AND TASTES
t MRS BW must diminish as he moves toward more bread and less wine—the MRS BW is continuously changing as he moves along his indifference curve. EXAMPLE 2 Understanding the Marginal Rate of Substitution <span>Tom Warren currently has 50 blueberries and 20 peanuts. His marginal rate of substitution of peanuts for blueberries, MRS pb equals 4, and his indifference curves are strictly convex. Determine whether Warren would be willing to trade at the rate of 3 of his blueberries in exchange for 1 more peanut. Suppose that Warren is indifferent between his current bundle and one containing 40 blueberries and 25 peanuts. Describe Warren’s MRS pb evaluated at the new bundle. &#


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