Suppose a consumer had a budget of $125. The price of Good X is $5 and the price

Question

Suppose a consumer had a budget of $125. The price of Good X is $5 and the price of Good Y is $7.50. Calculate value of the x-intercept of the budget line. (Round to the nearest two decimal places if necessary.) Answer Suppose the price of Good X is $1 and the price of Good Y is $2. If a consumer has a Marginal Rate of Substitution (MRSxy) of 0.5 for the bundle they are considering, then given their budget constraint, the consumer... Select one: a. Cannot reach a higher level of utility given their budget constraint. b. Would have a higher utility if they bought more of Good X. c. Would have a higher utility if they bought less of Good X

Explanation / Answer

Answer : 1) Given,

Budget (M) = $125 ;

Price for good X (Px) = $5

Price for good Y (Py) = $7.50

For budget line the X-intercept value = M/Px = 125/5 = 25 .

Therefore, here the budget line's X-intercept value is 25.

2) The correct option is a.

Because a consumer get higher utility when the consumer rich at higher indifference curve. Here, the MRSxy = 0.5 for the considered bundle with given budget constraint. The budget constraint shows the spending amount on both goods X and Y which is limited. Because of limited budget the consumer cannot attain the higher indifference curve. Hence for given budget constraint with MRSxy of 0.5 for considered bundle the consumer get maximum utility based on limited budget. Therefore, for given limited budget constraint it is not possible to attain higher indifference curve to get higher utility.

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