Consider the follow situations, true or false? Explain your reasoning. a. Assume

Question

Consider the follow situations, true or false? Explain your reasoning.

a. Assume there are two product choices: product "a" and product "b". Also assume that a consumer wishes to maximize satisfaction within a given budget. If, currently, the MUa / Pa > MUb / Pb, then the consumer would improve her welfare by purchasing less of "a" and more of "b".

b. As a general rule, a consumer may correctly maximize satisfaction by sequencing his choices, from first to last, by choosing the one with the highest marginal utility first, the one with the second highest marginal utility second, the one with the third highest marginal utility third, ... the one with the lowest marginal utility last.

c. Increases in product prices will shift the consumer's indifference curve to the right. .

d. The budget line shows all possible combinations of two goods that yield the same level of utility to the consumer.

e. In ordinal utility, consumer equilibrium occurs at the point where:       MRSxy = Py / Px.   (Assume good Y is on the Y axis and good X is on the X axis.)  

Explanation / Answer

Answer

a) This statement is False

Satisfaction or utility of consumer maximizes when MUa / MUb = Pa/ PbThis implies consumer maximizes satisfaction when MUa / Pa = MUb / Pb. Now MUa / Pa > MUb / Pb hence inorder equilize above inequality either MUa should decrease or MUb should increase. Hence a should increase(Law of diminishing Marginal Utility) or b should increase. Hence This Statement is False.

b) This statement is TRUE Hence in order to maximize satisfaction a consumer has to write in decreasing order of Marginal utility and then Use Condition MUx/Px = MUm here Mum is Marginal Utility of Money.

c) This statement is False

Indifference Curve depends on quantity of goods and does not depend on prices. IC shift if quantity of goods changes.Hence This statement is False.

d) This statement is False.

Budget line shows the combination of goods that consumer can pruchase by spending his given income and any point inside Budget line is affordable. Any point outside Budget line is not affordable. Budget line has no relation with Satisfaction.

The Curve shows all possible combinations of two goods that yield the same level of utility to the consumer.is known as Indifference curve.

Hence This statement is False.

e) This statement is False

As discussed in part (a)  consumer equilibrium occurs or consumer maximizes utility at the point where MRSxy = Px / Py.

Hence this tatement is False

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