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Question 1 Everyday morning Stephanie has a breakfast that consists of milk (m) and bagel (b) with the utility function of u (b, m) = b 2/3 m 1/3 ....

Question 1

Everyday morning Stephanie has a breakfast that consists of milk (m) and bagel (b) with the utility function of u (b, m) = b2/3m1/3 . Bagels cost $2 and milk costs $1 per cup. Her daily expenditure on breakfast is $12.

a) Suppose that she consumes 2 bagels and 8 cups of milk. Find the marginal rate of substitution. Is this an optimal choice? Why?

b) Suppose that she consumes 3 bagels and 3 cups of milk. Find the marginal rate of substitution. Is this an optimal choice? Why?

Top Answer

a).MRTS (marginal rate of substitution) is 8 and this is optimal point since... View the full answer

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