Determine the market rate of substitution

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Empirical data for the US have shown that medical costs have increased more rapidly than other prices. You are asked to show how rising medical costs have affected consumer alternatives. Suppose X represents the quantity of medical services, and Y represents the quantity of other goods. in addition, let income (M) be measured in hundreds of dollars, the price of medical services and other goods in terms of dollars per minute, with M = 150, PX = 5, and PY = 4. (a) Graph the budget line. Determine the market rate of substitution. (b) In your graph show the budget set. (c) If PX doubles, what happens to the budget constraint. Show this effect in your graph. (d) What is the meaning of the slope of the two budget constraints?

Reference no: EM13150689

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