Marginal Rate of Substitution
What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate.
In 300 words or more, please, provide your response to the above discussion question. Find two goods from your own consumption basket and explain how the MRS changes for the two products as you substitute one for the other.
Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education.
GUIDANCE: For this question review chapter 3. To provide some clarity, consider: (1) what it means to face a substitution situation; (2) Why are you having to be placed in this situation? What is your constraint? and What dictates how your decision is ultimately made? Is it utility? Preference? Enjoyment? Are these the same?
Please, read the article Hainer, R. (2010), provided in the required readings section for this week. The tobacco industry is a prime example to consider when talking about price elasticity of demand. While nicotine use can be addictive for many users, it is not addictive for the so-called “social smokers”.
What can we say about the price elasticity of demand for nicotine products (such as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the group of “social smokers”? Can we say whose demand is likely to be more elastic? Why?
Provide your response to the discussion question in 300 words or more. Further, comment on the effectiveness of government policy aimed at reducing the negative effects of smoking on health. For example, consider high taxation on producers? – is that effective?
Hainer, R. (2010). Social smokers aren’t hooked on nicotine, just smoking. Cable News Network. Retrieved from http://www.cnn.com/2010/HEALTH/04/24/social.smokers/index.html
GUIDANCE: For this discussion review chapters 3 and 4. To provide some clarity, consider: (1) Your sensitivity to price change. (2) A smoker’s sensitivity to price change of cigarettes. (3) Is this a demand for a necessity? (4) Does it feel like a necessity…in the eyes of the smoker? Consider insulin to a diabetic? They might be insensitive to a price change, so their demand for insulin would be inelastic…..insensitive means they could care-less if the price of insulin changes dramatically…..they need it to live, right ?
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