Steven has an income of $50, which he can spend on two goods: DVD and cups of ic

Question

Steven has an income of $50, which he can spend on two goods: DVD and cups of iced coffee. Both are normal goods for him; each DVD costs $10 and each cup of iced tea costs $2. For each of the following situations, decide whether this is Steven's optimal consumption bundle. If not, what should Steven do to achieve his optimal consumption bundle? a) Steven is thinking about buying 4 Dvd's and 5 cups of iced coffee. At that bundle, his marginal rate of substition of DVD in place of iced coffee is 1; that is, he would be just willing to exchange 1 fewer cup of iced coffe for 1 more Dvd. b) Steven is thinking about buying 2 DVD's and 15 cups of Iced tea. Steven's margnal utility of the second DVD is 25, and his marginal utility if the fifteenth cup if iced tea is 5. c) Steven is thinking about buying 1 DVD and 10 Cups of iced tea. At that bundle, his marginal rate of substition of DVD in place of hot choclate is 5;that is, he would be willing to exchange 5 cups of iced tea for 1 DVD.

Explanation / Answer

a) Steven is thinking about buying 4 Dvd's and 5 cups of iced coffee. At that bundle, his marginal rate of substition of DVD in place of iced coffee is 1; that is, he would be just willing to exchange 1 fewer cup of iced coffe for 1 more Dvd.

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