Question
Molly likes both jackets and (pairs of) shoes. She has many of both. Her marginal rate of substitution (MRS) of jackets for pairs of shoes
Molly likes both jackets and (pairs of) shoes. She has many of both. Her marginal rate of substitution (MRS) of jackets for pairs of shoes is fixed and equal to 4, meaning that she is always willing to trade 4 pairs of shoes for one jacket (keeping her level of satisfaction constant). The current price of a jacket is $400 and the price of a pair of shoes is $120. Molly claims that she can make herself better off by trading in some jackets in exchange for some pairs of shoes at the market rate. Is she right to claim so? If yes, how, if not, why not?
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