2. Suppose that Peggy’s marginal rate of substitution of two goods (MRSXY) is greater than the...
2. Suppose that Peggy’s marginal rate of substitution of two goods (MRSXY) is greater than the relative price ratio (Px/Py) in absolute value. Assuming that a diagram of Peggy’s budget constraint reflects the quantities of good Y measured on the vertical axis and quantities of good X measured on the horizontal axis, she will
- Buy more of good Y and move down the budget line
- Buy more of good Y and move up the budget line
- Buy more of good X and move down the budget line
- Buy more of good X and move up the budget line
- None of the above
Homework Answers
The optimal condition is MRS= MUx/MUy = Px/Py .
If MRSXY > Px/ PY , then Peggy will buy more of good X and move down the budget line because as the consumer buys more of good X ,then MUx starts decreasing and price of good X starts rising , as a result , the budget line move down ,and reached at the optimal bundle where MRS=Px/PY. Hence,option(C) is correct.
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Need help with this practice problem
2. (20 points) Suppose a consumer has $250 to spend on two goods, Good X and Good Y. The price of Good X is given by Py = $10. The price of Good Y is given by Py = $25. Graph the consumer's budget constraint. Please put the quantity of Good X on the horizontal axis, and the quantity of Good Y on the vertical axis. Be sure to label your graph carefully and...
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