Alex has a utility function over two goods: good X and good Y. These goods are perfect substitutes in consumption. Alex substitutes 2 units of good X with 1 unit of Y. When he goes to the market, he ends up buying 10 units of good X and 1 unit of good Y. What is the price ratio of these two goods: Px/Py=?
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We know that Alex substitutes 2 units of good X with 1 unit of Y. This means that the marginal rate of substitution (MRS) between X and Y is 2:1. Show more…
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