Mary has two dinner options available: eating a home cooked meal for $150 per meal, or at a restaurant for $260 per meal. Her weekly budget is $2500. i. Draw Mary’s budget constraint, (put home cooked meal on the horizontal axis) showing the trade-off between a home cooked meal and eating at a restaurant. ii.Draw an indifference curve showing the optimum choice. Label the optimum as point A. iii. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution
Mary has two dinner options available: eating a home cooked meal for $150 per
meal, or at a restaurant for $260 per meal. Her weekly budget is $2500.
i. Draw Mary’s budget constraint, (put home cooked meal on the horizontal
axis) showing the trade-off between a home cooked meal and eating at a
restaurant.
ii.Draw an indifference curve showing the optimum choice. Label the
optimum as point A.
iii. What would be the marginal rate of substitution at the point that
corresponds to the optimal consumption choice? Interpret the marginal
rate of substitution
(i)
The above diagram represents Mary's budget constraint.
(ii)
An indifference curve is a curve that represents the different combinations of two goods which represent the same level of utility. An optimal point of the indifference curve is a point achieved when the indifference curve is tangent to budget constraints. In the above diagram, Point A is the optimal point which is tangent to the budget constraint.
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