Assume that Cory has a weekly income of 100 and buys only tw

Assume that Cory has a weekly income of $100 and buys only two products, pizza and energy drinks. If the price of pizza is $12 and the price of an energy drink is $3, and energy drinks are measured on the x-axis, given Cory is maximizing his utility then what is the marginal rate of substitution between the two goods?

Solution

At optimality,

MRS = Price Ratio between the two goods

Here, P_x = $3 and P_y = $12

Since Cory is maximising his utility, he is at this equilibrium.

Thus, MRS = P_x / P_y = 3/12 = 0.25.

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