Q. 105.0( 1 Vote )

Suppose a consume

Answer :

(a) let the two goods be X and Y

Price of X=50

Price of Y=25

Total Income=1250



(b) the slope of the budget line


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


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



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


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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