1. The marginal rate of substitution is ________________ (Select all that apply)

a. Equal to the slope of the budget line at an optimal point if the optimal point is not at a corner.

b. How much of each good a consumer can afford.

c. The amount of one good an individual would be willing to trade for a different good and be just as well off.

d. The slope of the indifference curve.

e. Equal to the price ratio at an optimal point if the optimal point is not at a corner.

2. Which of the following do consumers use to select the optimal consumption bundle? (Select all that apply)

		a. Point where MU1 / P1 = MU2 / P2
		b. Point where slope of the budget constraint is equal to the slope of an indifference curve
		c. Point where Price Ratio is equal to Marginal Rate of Substitution
		d. Point where marginal utility per dollar is equal across all goods
		e. Point where the marginal product is equal to the market price.

Expert Solution

1. Marginal rate of substitution is the rate at which a consumer is ready to substitute the number of units of one good for one more units of other good. The slope of the indifference curve shows the marginal rate of substitution. For the optimal point or a utility maximization point the marginal rate of substitution is equal to the slope of the budget line where an optimum combination is not corner point. At the point of tangency the MRS between two goods is equal to the ratio of prices of two goods.

Answer: a. Equal to the slope of the budget line at an optimal point if the optimal point is not a corner.

C. The amount of one good an individual would be willing to trade for a different good and be just well off.

d. The slope of the indifference curve.

e. Equal to the price ratio at an optimal point if the optimal point is not at a corner.

2. For example when a consumer choose a bundle of two goods namely X and Y, at the optimum combination the MUx/Px/=MUy/Py. At this point the slope of the budget line is equal to the slope of the indifference curve, the price ration between these two goods is equal to marginal rate of substitution.

Answer: a. Point where MU1/P1=MU2/P2.

b. Point where slope of the budget constraint is equal to the slope of an indifference curve.

c. Point where the Price Ration is equal to Marginal Rate of Substitution.

Rahul Sunny answered 2 years ago

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