Goods x (coffee) and y (tea) are perfect substitutes. Imagine an individual whose utility

could be expressed as U = 2C + 1T. Graphically depict two indifference curves where I1

has a vertical intercept of 1T and I2 has a vertical intercept of 2T.

a) What is the marginal rate of substitution between tea and coffee?

b) Suppose an individual has a budget of $4 to spend on tea and coffee. If the price of

tea (PT) and the price of coffee (PC) are each $2/cup, graphically depict the budget

line and the optimal combination of tea and coffee.

c) Suppose that PT is unchanged at $2/cup but PC increases to $5/cup. In a separate

diagram, draw the new budget line, indicating its horizontal and vertical intercepts,

and identify the optimal combination of tea and coffee in this situation.