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11. Starbucks Coffee announced it would start adding an espresso shot to all its coffees in the UK. Suppose that after this change many consumers
11. Starbucks Coffee announced it would start adding an espresso shot to all its coffees in the UK. Suppose that after this change many consumers view Starbucks and Costa coffees as perfect substitutes, meaning that consumers are always willing to substitute a constant proportion of one coffee for the other. Consider a consumer who is always willing to substitute 2 cups of Starbucks coffee for one cup of Costa coffee. Do these preferences exhibit a diminishing marginal rate of substitution between Starbucks and Costa cof- fee? Assume that this consumer has $20 of income to spend on coffee, and the price of Starbucks coffee is $2 per cup and the price of Costa coffee is $3 per cup. How much of each type of coffee will be purchased? How would your answer change if the price of Starbucks coffee was $3 per cup and the price of Costa coffee was $4 per cup
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