Marginal Rate of Substitution

Part 1: Marginal Rate of Substitution What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate. – In 300 words or more, please, provide your response to the above discussion question. Find two goods from your own consumption basket and explain how the MRS changes for the two products as you substitute one for the other. Part 2: Demand Elasticity Read the article Hainer, R. (2010). The tobacco industry is a prime example to consider when talking about price elasticity of demand. While nicotine use can be addictive for many users, it is not addictive for the so-called “social smokers”. What can we say about the price elasticity of demand for nicotine products (such as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the group of “social smokers”? Can we say whose demand is likely to be more elastic? Why? Provide your response to the question in 300 words or more. Further, comment on the effectiveness of government policy aimed at reducing the negative effects of smoking on health. For example, consider high taxation on producers? – is that effective? Reference: Hainer, R. (2010). Social smokers aren’t hooked on nicotine, just smoking (http://www.cnn.com/2010/HEALTH/04/24/social.smokers/index.html). Cable News Network. Retrieved from http://www.cnn.com/2010/HEALTH/04/24/social.smokers/index.html

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