Question: . Laura's utility function for apple strudel (A) and schnitzel (S) is represented by U(A,S) = A0.250.8. Assume her income is $100 and the

. Laura's utility function for apple strudel (A) and schnitzel (S) is

. Laura's utility function for apple strudel (A) and schnitzel (S) is represented by U(A,S) = A0.250.8. Assume her income is $100 and the prices of apple strudel and schnitzel are $10 and $20 respectively. (1). (4 points) Write down in words what is meant by Laura's marginal rate of substitution of apple strudel for schnitzel. (ii) (8 points) Compute the marginal rate of substitution of apple strudel for schnitzel. (iii) (12 points) Given her income and the prices of the two goods, how many units of apple strudel and schnitzel will Laura purchase in order to maximize utility? (iv). (6 points) How will this optimal bundle of apple strudel and schnitzel change when all prices double and income is held constant? How will this optimal bundle change when all prices double and income doubles?

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SOLUTION i Lauras marginal rate of substitution of apple strudel for schnitzel MRS represents the amount of schnitzel that Laura is willing to give up ... View full answer

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