3. (A) Jim and Jack both like oatmeal and raisins, and they are both rational co

Question

3. (A) Jim and Jack both like oatmeal and raisins, and they are both rational consumers. Moreover, they have the same income and do their grocery shopping together at the same supermarket. Jim has a higher marginal rate of substitution of oatmeal for raisins at any given consumption bundle consisting of these two goods. Is it true or false that at their optimal consumption bundles, Jim's opportunity cost of raisins in terms of oatmeal is higher than Jack's? Provide an explanatioin (B) Alexa and Siri are two close friends. Alexa likes ice cream twice as much as frozen yoghurt, regardless of how much she consumes of each. A cup of frozen yoghurt costs less than half a cup of ice cream. Siri does the shopping for both of them. Should Siri buy ice cream or frozen yoghurt for Alexa? Why?

Explanation / Answer

Part a. The statement is essentially true. Marginal rate of substitution is a method of showing the opportunity cost. Jim has a higher marginal rate of substitution of oatmeal for raisins. This indicates that Jim will be willing to exchange more units of oatmeal for given units of raisins than Jack. Because Jim can sacrifice more units of oatmeal then Jack it means that is opportunity cost of raisin is more than that of Jack.

Part B. Given that Alexa likes ice cream twice as much as frozen yoghurt marginal utility of ice cream is equals to 2 times the marginal utility of frozen yogurt. The marginal rate of substitution between ice cream and frozen yoghurt has a value of - 2. From the information on the price we see that the price of ice cream is more than twice the price of a frozen yogurt. Since the price ratio is greater than 2 in absolute terms, MRS < Price ratio. Siri should buy frozen yoghurt for Alexa because it is less expensive.

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