Marc has a budget of $20 a month to spend on root beer and CDs. The price of root beer is $5 a bottle, and the price of a CD is $10. Figure 2 illustrates his preferences. Use Figure 2 to work Problems 1 to 3. 1. What is the relative price of root beer in terms of CDs and what is the opportunity cost of a bottle of root beer? Draw a graph of Marc’s budget line with CDs on the x-axis. 2. What quantities of root beer and CDs does Marc buy? What is his marginal rate of substitution of CDs for root beer at the point at which he consumes? 3. Suppose that the price of a CD falls to $5 and the price of root beer and Marc’s budget remain unchanged. What quantities of root beer and CDs does Marc now buy? What are two points on Marc’s demand curve for CDs?
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