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31 January, 13:58

Linda consumes two goods: x and y, has preferences that are smooth and maximizers are always interior, and income W=$150. If px=$25 and py=$5, what is the marginal rate of substitution of good x for good y for Linda at her optimal bundle?

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  1. 31 January, 14:17
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    Answer: The marginal rate of substitution is 5

    Explanation: Marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. The marginal rate of substitution for goods x for goods y is:

    Price of goods (x) divided by price of goods (y). That is,

    MRSxy = (Px / Py)

    MRSxy = 25 / 5

    MRSxy = 5.
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