(1) Suppose the optimal bundle of x and y for a consumer satisfies "tangency", MRS=Px/Py Explain...

(1) Suppose the optimal bundle of x and y for a consumer satisfies "tangency", MRS=P_x/P_y

Explain in words why this consumer would not want to choose a different bundle where MRS > P_x/P_y.

(2) Explain the difference between a Demand for a good, and a Demand Function for a good.

Solutions

Expert Solution

1. A rational consumer enjoys equilibrium when MRS = Px/Py. This is the situationby which the consumer is ready to purchase a bundle. And when MRS > Px/Py, he doesn't enjoys an equilibrium so the rational consumer will not go for the bundle with this situation. What he do is that, he substitute X for Y so that MRSxy declines and attain equilibrium.

2. Demand for a commodity or a good can be simply defined as, it is the desire, backed by ability and willingness to pay for a commodity. Demand is determined by the income of the consumer, tastes and preferences, prices of substitutes etc. On the other hand, demand function shows the relation between the quantity demanded and the price of the commodity.

Q = a - bP, where P is the price and a and b are constants.

Rahul Sunny answered 1 year ago

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