4= Assume Mr. Abebe spends all his daily income of birr 100 on food, and he purchases bread and coffee. The price of a loaf of bread is birr 5, and the price of a cup of coffee is birr 10. If Mr Abebe purchases 5 cups of coffee and 10 loaf of bread, and make his marginal rate of substitution between coffee and bread to be one. Is Mr Abebe at his equilibrium point? If yes, explain how? If no, explain how he can manage to reach his equilibrium point.
Yes, Mr Abebe is at his equilibrium point. This is because he is spending all of his income on the two goods, and his marginal rate of substitution between coffee and bread is one. This means that he is willing to give up one cup of coffee for one loaf of bread, and vice versa. This is the optimal combination of goods that maximizes his utility given his budget constraint.
No, Mr. Abebe is not at his equilibrium point. In order to reach his equilibrium point, he would need to buy the same amount of coffee and bread so that the marginal rate of substitution between them is equal to one. He can do this by purchasing 5 loaves of bread and 10 cups of coffee evenly. This will give him an MRS of 1 and he will be at his equilibrium point.
Well, Mr. Abebe seems to be quite the coffee and bread enthusiast! But let's analyze his situation.
To determine if he is at his equilibrium point, we need to look at his marginal rate of substitution (MRS), which is the amount of one good that Mr. Abebe is willing to give up to obtain an additional unit of the other good, while keeping his satisfaction (utility) constant.
Here, we know that his MRS is 1. This means that he is willing to give up 1 cup of coffee to get 1 loaf of bread, and vice versa.
However, let's calculate his current MRS using the given information. Mr. Abebe is purchasing 5 cups of coffee (costing him 50 birr) and 10 loaves of bread (costing him 50 birr). So, his current budget constraint is satisfied.
But, since we don't have any information about his level of satisfaction or utility, we can't accurately determine if he is at his equilibrium point.
To reach his equilibrium, Mr. Abebe needs to adjust his consumption of coffee and bread until his MRS is equal to 1. If he prefers coffee more than bread, he should consume less coffee and more bread to increase his MRS. If he prefers bread more, he should do the opposite. The goal is to find the combination of coffee and bread that will make his MRS equal to 1 and maximize his utility.
So, in conclusion, Mr. Abebe is not necessarily at his equilibrium point yet. He needs to adjust his consumption to reach a level where his MRS is equal to 1 and he is maximizing his satisfaction. That way, he'll have his coffee and bread in perfect harmony!
To determine if Mr. Abebe is at his equilibrium point, we need to compare his marginal rate of substitution (MRS) with the relative prices of coffee and bread.
The marginal rate of substitution (MRS) represents the amount of one good an individual is willing to give up in exchange for an additional unit of another good, while still maintaining the same level of satisfaction.
Given that Mr. Abebe spends all of his daily income on food, we can calculate his total expenditure on coffee and bread as follows:
Expenditure on coffee = Price of coffee x Number of cups purchased
= 10 birr/cup x 5 cups
= 50 birr
Expenditure on bread = Price of bread x Number of loaves purchased
= 5 birr/loaf x 10 loaves
= 50 birr
Therefore, Mr. Abebe spends a total of 50 birr on both coffee and bread.
Now let's determine his MRS. We know that his MRS is one, which means he is willing to give up one loaf of bread for one cup of coffee while maintaining the same level of satisfaction.
To find the relative price ratio of coffee to bread, we divide the price of coffee by the price of bread:
Relative price ratio = Price of coffee / Price of bread
= 10 birr/cup / 5 birr/loaf
= 2 cups of coffee / 1 loaf of bread
Since Mr. Abebe's MRS is one, which is equal to the relative price ratio, we can conclude that he is at his equilibrium point. This means he is maximizing his satisfaction given the prices of coffee and bread.
In summary, Mr. Abebe is at his equilibrium point because his MRS between coffee and bread is equal to the relative price of coffee to bread (1:2). He is spending all his daily income on food and purchasing 5 cups of coffee and 10 loaves of bread, which allows him to maximize his satisfaction given the prices of both goods.
To determine if Mr. Abebe is at his equilibrium point, we need to compare his marginal rate of substitution (MRS) with the ratio of prices of coffee and bread. If the MRS is equal to the price ratio, Mr. Abebe is at his equilibrium point.
First, we need to calculate the MRS, which is the rate at which Mr. Abebe is willing to trade one unit of coffee for one unit of bread. In this case, the MRS is assumed to be 1 (as stated in the question). This means that Mr. Abebe values one cup of coffee the same as one loaf of bread.
Next, we calculate the price ratio. The price of coffee (birr 10) divided by the price of bread (birr 5) gives us a price ratio of 2:1.
Since the MRS of 1 is not equal to the price ratio of 2:1, Mr. Abebe is not at his equilibrium point. To reach equilibrium, Mr. Abebe should adjust his consumption of coffee and bread to balance the MRS with the price ratio.
To do this, he can either increase or decrease his consumption of coffee and bread. Since Mr. Abebe is already consuming 5 cups of coffee and 10 loaves of bread, and the MRS is 1, it means he values coffee and bread equally, but the price ratio is 2:1. In this case, he should decrease his consumption of coffee and increase his consumption of bread.
He can achieve equilibrium by adjusting his consumption until the MRS is equal to the price ratio. For example, if Mr. Abebe reduces his coffee consumption to 4 cups and increases his bread consumption to 8 loaves, his MRS would be 1 (coffee : bread) and the price ratio would also be 2:1. This would put Mr. Abebe at his equilibrium point.
In summary, Mr. Abebe is not currently at his equilibrium point. However, he can reach equilibrium by adjusting his consumption of coffee and bread until the MRS (1) equals the price ratio (2:1).