Jon is at the grocery store purchasing meat for the next few days. He has filled

Question

Jon is at the grocery store purchasing meat for the next few days. He has filled his basket with all of the meat he can afford given his budget. Suppose that if he purchased and consumed the "bundle" in his basket, his marginal utility from eating salmon (let this be good x) would be at 100 utils per pound and his marginal utility from eating chicken breast (let this be good y) would be at 60 utils per pound. Given this information, what is the marginal rate of substitution between salmon and chicken breast at his current bundle? Interpret your answer to part a. (What does this tell us?) If the price of salmon is $8 per pound and the price of chicken breast is $4 per pound, is the bundle that is currently in Jon's basket his optimal consumption bundle? If not, what changes would you recommend he make and why?

Explanation / Answer

A) Marginal rate of substitution between salmon and chicken breast is

100 is the value jon put on salmon

60 is the value he put on chicken

MRXuy = MUx/ MUy

So right now 100/60 = 1.6

B) This tell that john gets more satisfaction eating salmon, In order to get similar satisfaction of 100 units john has to eat 160 of chicken

C) The price of salmon is $8 which is expensive

Price of chicken breast is $4 which is cheaper but also gives only 60% of satisfaction for jon

So certainly he must look at chicken when he also considers price, Chicken is only 50% of the price of salmon and he gets 60% satisfaction.

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