Question

PLEASE ANSWER QUESTIONS (E) and (F).  I already got the answer for the other questions but the expert did not answer questions E and F. Thank you!

(Use this information to answer a, b, c below) Suppose Mary’s utility function for two goods X and Y is given by:

U(X,Y) = 3X^1/2Y^1/2 . Suppose consumption bundle A consists of 10 units of X and 30 units of Y, and consumption bundle B consists of 40 units of X and 20 units of Y.

a. Consumption bundle A lies on a higher/lower/same indifference curve than consumption bundle B. Show computations.

b. Compute Mary’s MRSxy at consumption bundle A. What does this number tell you?

c. If Mary chose consumption bundle B, her MRSxy would be a higher or lower compared to MRSxy at A? Please explain why.

d. Mary’s preference is transitive. Could two of Mary’s IC’s intersect? Please explain using a graph below.

e. State the equi-marginal principle. Suppose Jane is consuming a bundle of X and Y where MUx = 3,  MUy = 4, Px = $1, Py = $2. To maximize utility, Jane should increase the consumption of good ___ and decrease the consumption of good ____. Explain your answer by using the equi-marginal principle.

f. True or False and briefly explain: If at any consumption bundle, MRSxy <Px/Py, a consumer can enjoy a higher level of utility by increasing the consumption of X and decreasing the consumption of Y.

Answer 1

E) equi - marginal principal says CONSUMER will spend his income in a way ,so that last income spend on x and y gives same marginal utility.

MUx/px=3/1=3

MUy/py=4/2=2

MUx/px>MUy/py

So per dollar MU from X is higher than per dollar MU from Y,so CONSUMER should increase consumption of x and Decrease consumption of y to MAXIMIZE utility

F)

Equi marginal principal;MUx/px=MUy/py

If we drag MUy to LHS ,then

MUx/MUy=px/py

MUx/MUy=MRSxy

MRSxy=px/py

If,MRS<px/py

MUx/MUy<px/py

MUx/px<MUy/py

So per dollar MU from Y is higher than pe dollar MU from x, so CONSUMER should increase consumption of Y and Decrease consumption of X to MAXIMIZE utility.

So statement is wrong