Is the following statement true or false? Briefly explain youranswer. "Two consumers with utility functions...

Is the following statement true or false? Briefly explain your answer. "Two consumers with utility functions of U(x,y)=x.y and V(x,y)=1/2ln(x)+1/2ln(y), respectively, have different preferences and therefore would rank baskets of goods x and y differently from each other.

Expert Solution

Two different utility functions show same preferences if their respective MRS are same.

U = xy

MRS of U = MUx/MUy = (y/x) ----equation 1

V = 0.5lnx + 0.5lny

MRS of V = MUx/MUy = (0.5/x) / (0.5/y)

MRS of V = (y/x) ------equation 2

Using equation 1 and 2

MRS of U = MRS of V

Hence, the preferences are same and not different.

So, Statement is FALSE

Rahul Sunny answered 3 years ago

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