question archive Problem on Consumer Choice Suppose that a consumer has a taste for both doughnuts and slices of cake
Problem on Consumer Choice
Suppose that a consumer has a taste for both doughnuts and slices of cake. The doughnut costs $0.45 per piece while the cake costs $0.90 per slice. Let doughnuts be good 1 and cake slices be good 2.
a ) Assume that the consumer's indifference curve is convex for doughnuts and slices of cake. If the consumer is currently at a point where his MRS12 is equal to 2, is the consumer at equilibrium? Explain briefly. (1- 2 sentences)
b) Suppose that instead of having a convex indifference curve between doughnuts and cake slices, the consumer has a linear indifference curve indicating that doughnuts and cake slices are perfect substitutes. How many doughnuts and slices of cake will the consumer buy if he has $4.5 to spend? Explain briefly. (1-2 sentence)