Figure 21-19
-Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. The consumer will choose a consumption bundle where the marginal rate of substitution is
A)2.
B)2/3.
C)1/2.
D)1/3.

Question

Figure 21-19 
-Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. The consumer will choose a consumption bundle where the marginal rate of substitution is
A)2. 
B)2/3. 
C)1/2. 
D)1/3.

Quizplus · Accepted Answer

The consumer will choose the consumption bundle where the ratio of the marginal utility of Skittles to the marginal utility of M&M's equals the price ratio (MU S/MU M = P S/P M).

In this case, the marginal utility of Skittles is 5 and the marginal utility of M&M's is 10. So, MU S/MU M = 5/10 = 1/2.

The price ratio is 2/4 = 1/2.

So, the marginal rate of substitution is 1/2.

To maximize utility subject to the budget constraint, the consumer should choose a consumption bundle where the marginal rate of substitution equals the price ratio. This occurs at point W in the figure, where the consumer purchases 4 units of Skittles and 2 units of M&M's. This consumption bundle costs $16, which is within the consumer's budget, so it is the best choice.

Figure 21-19 -Refer to Figure 21-19. Assume That the Consumer Depicted in Consumer