Question

123 4 5 8 9 10 10 points / Saved The figure below shows three budget constraints. Each of them represents three different prices for the price of X while the budget remains at $36 U1 U2 Qx Since points A, B, and C are points are where three different indifference curves are tangent to the budget constraint, vw know that all three point cannot be optimal bundles for the consumer. True False

Answer 1

Q.1.

TRUE

A, B and C are different optimal consumption bundles because point of optimality is given by:

$MRS = \frac{MU_y}{MU_x} = \frac{P_y}{P_x}$

Px changes => Optimal bundle change

Q.2.

Slope of budget constraint:

$Slope = \frac{P_y}{P_x}$

Hence the price of X at point C indicates the highest price of X out of all three prices for X.

FALSE

Q.3.

$Slope = \frac{P_y}{P_x}$

Price of X at C > Price of X at B > Price of X at A

If the price of X at point A is $2.25, then price of X at point B should be less than price of X at point C,

Correct Ans - A