Johnny has allocated $30 toward coffee and tea and feels that coffee and tea are perfect substitutes. Due to differences in caffeine levels, his MRS of tea for coffee equals 2. If coffee and tea sell for the same price, Johnny will

B. spend all $30 on coffee.

Explanation:

The options are:

a. spend all $30 on tea. a. spend all $30 on tea.

b. spend all $30 on coffee.

c. spend $20 on coffee and $10 on tea. d. be indifferent between any bundle of coffee and tea costing $30

The marginal rate of substitution (MRS) is simply referred to as the rate by which a certain consumer will be willing to give up and substitute the consumption of a particular good for something else while the consumer still maintains thesame satisfaction level.

In this scenario, we can infer that for the consumer, he prefers coffee than tea and based on MRS 2, the consumer is actually indifferent between a unit of coffee and two units of tea. Therefore, at an equal price, such consumer will spend all the $30 on coffee.

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