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Michael Jordan lives in a world with only two goods: basketballs and Gatorade. Basketballs cost $10 each. Gatorade costs $2 per bottle. Point A on the graph below represents Jordan's optimal consumption point given these prices and his income.
a. Calculate Jordan's marginal rate of substitution of Gatorade for basketballs at point A, and explain in words what this number means.
Suppose now that the price of Gatorade drops to $1/bottle. Jordan's new budget constraint is represented by the line BG.
b. True or False. Explain.
Jordan's new optimum consumption bundle could fall between points B and C or between points F and G if either basketballs or Gatorade is an inferior good.
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