Hermione and Ron are at a sweet shop in London. Hermione looks at the prices of ice cream and chocolate bars and says to Ron: "I can tell you what your marginal rate of substitution between ice cream and chocolate bars is at your best affordable
point." "No, you can't," says Ron. "You don't know my preferences and how much money I have." "I don't need to know all this because I know the prices," Hermione replies. Is she right? Explain.
Yes, Hermione is correct. All information she needs is the relative price of ice cream in terms of chocolate bars (or vice versa), which determines the slope of Ron's budget line. The marginal rate of substitution at Ron's best affordable point is the slope of his indifference curve at this point. But because the best affordable point is the point where the budget line is tangent to the highest attainable indifference curve, the slope of the indifference curve at this point equals the slope of the budget line. So if Hermione knows the relative price, she knows the slope of Ron's budget line. Then she also knows the slope of his indifference curve at the best affordable point, which is the marginal rate of substitution at this point.
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Assume that the dollar price of a basket of goods in the U.S. is $4 and the Indian price for the same basket is 200 rupees. On the other hand, the dollar price of the Indian basket is $20
Given this information, the Indian price for the Indian basket will be: A) $1,200. B) $1,000. C) $200. D) $5.
The opportunity cost of holding money is:
A. heavy and awkward. B. the probability of theft or loss. C. the ease of conducting everyday business. D. the return that could have been earned from holding wealth in other assets.