What is the meaning of the term "marginal rate of substitution"?
What will be an ideal response?
The marginal rate of substitution between two goods is the rate at which a consumer is willing to give up some of one in exchange for more of the other, and remain indifferent between the old and the new combination. It is also the slope of an indifference curve between the two goods.
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The indifference curves in the figure above (I1, I2, and I3 ) reflect Peter's consumption preferences. Which of the following combinations of goods does Peter prefer the most?
A) 48 slices of pizza and 12 chocolate bars B) 24 slices of pizza and 24 chocolate bars C) 40 slices of pizza and 20 chocolate bars D) 32 slices of pizza and 8 chocolate bars
In the automobile insurance market, adverse selection occurs when
A) drivers with greater risks buy a policy with large deductibles. B) drivers with greater risks buy a policy with no deductibles. C) uninsured drivers drive recklessly. D) insured drivers drive recklessly.