Q. 105.0( 1 Vote )

# Suppose a consume

(a) let the two goods be X and Y

Price of X=50

Price of Y=25

Total Income=1250

50x+25y=1250

2x+Y=50

(b) the slope of the budget line

2x+Y=50

The goods willing to sacrifice by X/by Y = -2/1=-2

(c) If she spends the entire 500 on good X the consumption of Y would be 0.

So, 2x+(0)=50

X=25

(d) If she spends the entire amount on good Y, then

2(0)+Y=50

Y=50

But since the price has been doubled 50/2=25

OR

Marginal rate of substitution is the rate at which the consumer readily gives up one commodity for an extra unit of another commodity.

Condition to be in equilibrium:

Marginal utility of product x / Price of x = Marginal utility of y/Price of y

i.e. MUx/Px= MUy/Py

or Px/Py= MUy/MUx

this shows that consumer to be in the equilibrium position, marginal rate of

substitution between the two goods must be equal to the ratio of prices of

the two goods.

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