Molly received utility from consuming apples (X) and shoes (Y), as given by the utility function TU=f(X,Y) = XY In addition, the price of apples (X) is $2 per unit and the price of clothing (Y) is $10 per unit. Molly has $50 to spend on both goods. Suppose Molly is consuming at a bundle with more apples (X) and less shoes (Y) than her utiltiy maximizing bundle. Would her marginal rate of substitution of apples (X) for shoes (Y) be greater or less than her marginal rate of substitution at equilibrium? Explain.

Molly received utility from consuming apples (X) and shoes (Y), as given by the utility function TU=f(X,Y) = XY

In addition, the price of apples (X) is $2 per unit and the price of clothing (Y) is $10 per unit. Molly has $50 to spend on both goods.

Suppose Molly is consuming at a bundle with more apples (X) and less shoes (Y) than her utiltiy maximizing bundle. Would her marginal rate of substitution of apples (X) for shoes (Y) be greater or less than her marginal rate of substitution at equilibrium? Explain.

 

 

Answer:

Marginal rate of substitution is mux/muy

Which is y/x here

Now suppose this is equal to 10 at profit max output but niw more apple and less shoes means denominator will increase and thus we can say that mrs will be less at this point compared to equilibrium.

Asked on February 15, 2018 in No Category.
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