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Marginal Rate of Substitution

Let commodity 1 be bottled water, measured in gallons. Commodity 2 denotes plain tap water, also measured in gallons.
A. Samantha places no premium on commodity 1; that is, she regards a unit of the first good as no different - not better and not worse - than a unit of the second good. Draw a typical indifference curve for Samantha. If commodity 1 is ten times more expensive than commodity 2, how much of the former will Samantha consume? Do we have to know what her income is in order to answer this question? Explain.
B. Tyler thinks that bottled water is better than tap water. Draw an indifference curve for Tyler through the bundle at (2,2), which is the bundle with two units of each good. We haven't given you enough information about Tyler's preferences to enable you to draw the indifference curve precisely, but you have enough information to determine whether the bundle (3,1) is on, above, or below the indifference curve through bundle (2, 2).

Solution Summary

Marginal Rate of Substitution is analyzed in the following posting.