Marginal rate of substitution

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  1. Consider Jane, who survives on Pizza (Z) and Burritos (B). Each month, Jane has to decide what combinations on these two she is going to purchase. Jane’s utility from the consumption of these two is given by: U(B,Z) = 5B^1/2*Z^1/2

a. Compute MUz at (B,Z) = (10,10) and (4,25). Is MUz smaller at (10,10) relative to (4,25)? Why?

b. Compute MRSbz at (10,10). Explain what this measures. Why does it decline as we move down an indifference curve?

c. Suppose that PB = $5 and Pz = $20 per unit. Suppose that each month, Jane has $400 to spend on these two goods. If Jane wishes to maximize utility, how many units each of Burrito and Pizza should Jane purchase? Graph the IC and budget constraint to show your solution. Label properly.

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