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2. (3 pts.) Given the graph below: a. At point A is MRS equal to, greater than, or less than the ratio of the prices (circle one b. Will they buy more of Y or more of X or maintain the combination of goods at A to c. What will the value of the MRS be when the consumer is maximizing their utility given option)? maximize their utility (circle one option)? the budget line shown in the graph? 10

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Answer #1

(1) At point A, MRS is equal to the ratio of prices.

At point A, consumer is spending all of his/her income but still there is a chance to consume on higher IC and get higher utility at the tangency between budget line and higher IC.

(2). Consumer will buy more of Y at the tangency between budget line and higher IC.

(3). Consumer maximize utility at the tangent point, occurs between budget line and IC.

So that at maximizing utility point, slope of IC (I e., MRS) and slope of budget line (i.e. Px / Py) is equal.

MRS = Px / Py

MRS = slope of budget line.

MRS= 10 / 5.

MRS = 2.

Thus, MRS will be 2 when the consumer is maximizing their utility.

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