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Two friends have different incomes and very different tastes for cigarettes and beer (although both their preferences satisfy the usual assumptions of completeness, nonsatiation, transitivity and convexity).
Nevertheless, they always have the same marginal rate of substitution of beer for cigarettes. True or false?

2007-12-08 12:09:19 · 2 answers · asked by Anonymous in Social Science Economics

2 answers

TRUE- MRS{xy}=Px/Py for utility maximization point for all consumers who smoke and drink beer

2007-12-08 12:34:33 · answer #1 · answered by meg 7 · 1 0

True: their budget lines must be parallel, and whatever the indifference curves are their slopes (MRS here) are the same at optimal point of choice for both of the persons, and at optimal point the budget line is tangent to the indifference curve, and we know that parallel lines have same slope. The assumptions rule out kinky tastes.

2007-12-08 12:23:53 · answer #2 · answered by ArArAt 3 · 0 1

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