Question

Need as much details as possible. Microeconomics.

Irina is consuming bundle A=(x_A=8, y_A=4). The prices of x and y are the same. Her MRS at bundle A is MRS_x,y(A)=2.

Which statement is correct?

a. Irina can increase her utility by consuming more of y and less of x.

b. Bundle A is Irina’s optimal bundle if she is spending all her income.

c. Irina can increase her utility by consuming more of x and less of y.

d. Bundle A is Irina’s optimal bundle because xAyA=MRSx,y(A).

Answer 1

It is given in that the bundle consumed by Irina is A=(x_A=8, y_A=4) and her MRS at bundle A is MRS_x,y(A)=2, price of the commodities x,y being the same. A consumer is said to be in equilibrium, when he can maximise his satisfaction, with given income and prices of commodities. Irina can only attain equilibrium, if she is consuming the optimal bundle.

The equilibrium will be attained at a point where,

  

In the given question,

MRS_x,y(A) = 2,

Px = Py (Given), which means, Px / Py = 1

implies,

It means than Irina values good X more than what market values. She is willing to pay more for good X than the price prevailing in the market. Irina will buy more of good X and less of Y.

How can equilibrium be attained

In the above situation, equilibrium can only be attained if Irina keeps on consuming more of good X than good Y for longer periods. This will lead to fall in marginal utility of good X and rise in that of Good Y due to Law of Diminishing Marginal Utility. This process continues to the point where MRSxy = Px/Py, which is equilibrium condition and the optimal bundle is attained by Irina.

So, the answer is option c) Irina can increase her utility by consuming more of x and less of y.

Hope that helps.