Suppose you are showing apples on horizontal axis and oranges on vertical axis. If the consumer...
Suppose you are showing apples on horizontal axis and oranges on vertical axis. If the consumer is buying the quantity of apples and oranges combination in such a way that marginal rate of substitution of apples for oranges exceeds price of apples/oranges ratio (MRSao＞Pa/Po), what should consumer do to maximize satisfaction?
Homework Answers
Ans. Since MRS ao > Pa/Po which means that consumer is buying more quantity of oranges than the number of apples. Therefore, to reach the utility maximization level, a consumer should exchange more apples for the quantity of oranges until reach on the equilibrium level where the marginal rate of substitution of apple for oranges ( MRS ao) is equal to the ratio of the price of apples and oranges (Pa/Po).
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