Question

Given two goods named Omega & Alpha, with Omega along the vertical axis, and Alpha on the

horizontal. Assume that the budget is constant at 100 pesos, the price of good Omega is fixed at 5

pesos. The Price of Alpha changes from 1 peso to 2 pesos. What is the MRS at the old price of

Alpha?

Answer 1

At initial price we have

Price of omega=5

Price of alpha=1

Therefore optum MRS will be

$MRS=\frac{price \space of \space alpha}{price\space of \space omega}=\frac{1}{5}=0.2$

MRS at old price=0.2