5. Susie is at the grocery store buying milk. She has a choice between milk from

Question

5. Susie is at the grocery store buying milk. She has a choice between milk from Dairy A or milk from Dairy B. She doesn’t actually care at all which dairy her milk comes from.

(a) Draw a possible indifference curve for Susie between milks A and B.

(b) What is the marginal rate of substitution between A & B?

(c) Suppose milk A costs $2 per gallon and milk B costs $1 per gallon. Susie has $10. Draw her budget constraint on the same graph you drew above and label each intercept.

(d) How much of milk A and how much of milk B will Susie buy if she maximizes her utility? Explain.

Explanation / Answer

A) First think what an indifference curve is. An indifference curve is a graph that shows different bundles of goods that give someone the same level of utility. Every Point on the curve gives the person the same level. So if both types of milk are perfect substitutes than the indifference curve would be a straight line. B) The marginal rate of substitution is the rate at which one is willing to give up one good for another. So if the goods are perfect substitutes than the person would give up equal amounts or have a marginal substitution of1. C) If milk a cost A cost more than milk B than Susie would not buy any of milk a and all of milk B D) To maximize Susie's utility she would not buy any milk A and only milk B.

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