Year 12s: what will be the first way you research your future options? >>

Managerial economic, MRS and substitute, helllp!

1. Starbucks Coffee announced that it would start adding an additional espresso shot to all its coffees in the UK. Suppose that after this change many consumers view Starbucks and Costa coffees as perfect substitutes [meaning that consumers are always willing to substitute a constant proportion of one coffee for the other]. Consider a consumer who is always willing to substitute 2 cups of Starbucks coffee for 1 cup of Costa coffee. Do these preferences display a diminishing marginal rate of substitution between Starbucks and Costa coffee? Assume that this consumer has $20 to spend on coffee, that the price of Costa coffee is $3 per cup, and that the price of Starbucks coffee is $2 per cup. How much of each type of coffee will be purchased? How would this answer change if the price per cup of a Starbucks (Costa) coffee was $3 ($4) instead?