Prof. Jonathan Gruber, The Budget Constraint (3.17) - Understanding Consumer Behavior Through MRS and MRT
Can anyone tell me what that means? Your marginal rate of substitution (MRS) is 2.5. What does that mean? That is a meaningful concept. Utils are not, but that is. Yeah, say it loudly so we can hear. AUDIENCE: You're willing to trade -- you're willing to trade two pizzas for one cookie. JONATHAN GRUBER: You're willing to trade? Exactly, you're willing to give up 2.5 slices of pizza for one cookie. That's what that number means. And that is a meaningful number. That's not an ordinal. That's cardinal. We can use that. You are willing to give up 2.5 slices of pizza to get one cookie. What is the market asking you to give up? How much pizza do you have to give up to get one cookie? Half a slice. You are happy to give up 2 and 1/2 slices of pizza to get a cookie, but the market is saying we'll let you have a cookie for half a slice of pizza . So what should you do? AUDIENCE: Trade. JO...