Question
A consumer buys goods \(x\) and \(y\) at prices ₹4 and ₹2 per unit, respectively, with income ₹100. Preferences are smooth, monotonic and strictly convex, and the optimum is interior. Defining \(MRS_{xy}=MU_x/MU_y\), which pair of conditions must hold at the optimum?
The correct answer is
\(MRS_{xy}=2,\quad 4x+2y=100\)
At an interior optimum, \(MRS_{xy}=P_x/P_y=4/2=2\). Monotonic preferences imply that the consumer exhausts the budget, so \(4x+2y=100\).
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Important Questions from Indifference curve analysis - Teaching
Which one of the following is not the basic property of indifference curves ?
Along a smooth, strictly convex indifference curve for two desirable goods X and Y, what happens to the positive marginal rate of substitution of X for Y as X consumption increases?
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