We can use the utility-maximizing rule to determine whether consumers are doing the best they can. Suppose
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From the utility-maximizing rule, we know that when a consumer is maximizing utility, the marginal rate of substitution equals the price ratio. You know the price ratio for the holiday party is 2.0 (the price of punch is twice the price of cookies), so the question for the typical employee is “What is your marginal rate of substitution?” Or in more familiar language, “How many cookies would you be willing to trade for one cup of punch?”
If the answer is two cookies per cup of punch, the MRS equals the price ratio, and the firm did the best it could. On the other hand, if the answer is five cookies per cup of punch, the MRS exceeds the price ratio, and the firm could have generated higher utility with its $200 by providing more punch and fewer cookies.
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Related Book For
Macroeconomics Principles Applications And Tools
ISBN: 9780134089034
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
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