Suppose the only characteristic of beer that a consumer cares about is alcohol content. Currently, Bud Light and Miller Lite have the same alcohol content.
a. Using
to denote ounces of Miller Lite and
to denote ounces of Bud Light, what's the simplest possible utility function that can describe this consumer's tastes over the two products.
b. Suppose Bud Light
lowers its alcohol content by 50%. How would you change the utility function to account for this?
c. Derive the MRS for the functions in (a) and (b) --- and interpret your answer.
What will be an ideal response?
b.
c. In (a), MRS = -1 --- i.e. no matter what bundle the consumer consumers, she is always willing to trade one Bud Light for one more Miller Lite.
In (b), MRS = -2 --- i.e. no matter what bundle the consumer consumes, she is always willing to trade 2 Bud Lights (that now have half the alcohol content) for 1 more Miller Lite.
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