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 Jane 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 Jane 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:

Jane is consuming a bundle of apples and shoes where she is not maximizing her utility. She is s consuming at a bundle with more apples (X) and less shoes (Y) than her utiltiy maximizing bundle. Her marginal rate os substitution of apples (X) for shoes (Y) would be greater than her marginal rate of substitution at equilibrium. as she substitutes more of shoes for apples, the MRS diminises.

Asked on February 15, 2018 in economics.
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