utility (x1, x2) = x1,x2

running store = x1

hot dogs = x2

hotdogs cost x2=$3

income, Y= $96

The running store has two payment options. Number 1 is to pay p1=$16 per running store session or number 2 is to pay an annual membership fee, F, and then pay phat1=$1 per running store session.

i. What is the MRS and what is the importance of a diminishing MRS?

What is the total spending on hotdogs if the person chooses option 1. Explain how this total spending on hot dogs depends on p1.

ii. If the running store wants the person to pay with number 2 - what is the largest annual fee, F, it can charge? Explain the steps and/or use a diagram or graph.