A decision maker is choosing the levels of two activities, A and B, so as to maximize total benefits under a given budget. The prices and marginal benefits of the last units
of A and B are denoted P_A, P_B, MB_A, and MB_B.
a. If P_A = $20, P_B = $15, MB_A = 400, and MB_B = 600, what should the decision maker do?
b. If P_A = $20, P_B = $30, MB_A = 200, and MB_B = 300, what should the decision maker do?
c. If P_A = $20, P_B = $40, MB_A = 300, and MB_B =5 400, how many units of A can be obtained if B is reduced by one unit? How much will benefits increase if this exchange is made?
d. If the substitution in part c continues to equilibrium and MB_A falls to 250, what will MB_B be?