In the absence of money, Ralph uses his supply of coal as means to obtain other
ID: 1225412 • Letter: I
Question
In the absence of money, Ralph uses his supply of coal as means to obtain other items. At the beginning of winter, Ralph estimates he has a surplus of coal and trades it at a rate of 2lbs of coal for each 1/2 pound of coffee he needs.
The winter is colder than anticipated, and as his excess coal supply dwindles, he is only willing to give up 1 lb of coal for 1/2 pound of coffee. This is an example of:
Multiple Choice
a)The diminishing rate of marginal substitution.
b) the law of demand
c) a decrease in supply
d) an increase in supply
a)The diminishing rate of marginal substitution.
b) the law of demand
c) a decrease in supply
d) an increase in supply
Explanation / Answer
a) The diminishing rate of marginal substitution.
(The marginal rate of substitution is the rate at which a consumer is ready to give up one good in exchange for another while maintaining the same level of utility. In this case it decreases from 4 (2/0.5) to 2 (1/0.5).
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