Question

The price of lemonade is $1.50; the price of popcorn is $0.75. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be: Group of answer choices 1/2 lemonade for each popcorn. indeterminate unless more information on Fred's marginal utilities is provided. 2 lemonades for each popcorn. none of these options is correct

Answer 1

Answer: 1/2 lemonade for each popcorn

Explanation:

Price of lemonade = $1.50

Price of popcorn = $0.75

Let good 1 = popcorn

Let good 2 = lemonade

MRS = MU1/MU2 = P1/P2

= 0.75/1.50

= 1/2

Therefore, the marginal rate of substitution will be 1/2 lemonade for each popcorn.

Therefore, the correct option is A.