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Penelope’s ratio of marginal utility for a books to crayons (MUB / MUC) is 3/1, while...

Penelope’s ratio of marginal utility for a books to crayons (MUB / MUC) is 3/1, while the price ratio of books to crayons (PB / PC) is 1.5/1.0. Which of the following is/are true? Choose all that are correct.

A. Penelope can increase utility by decreasing her consumption of books by 4 units and increasing her consumption of crayons by 6 units.

B. One more book provides Penelope with 3 times the utility of one more box of crayons.

C. Penelope can increase utility by decreasing her consumption of crayons by 1 unit and increasing her consumption of books by 1.5 units.

D. Penelope can increase utility by decreasing her consumption of crayons by 3 units and increasing her consumption of books by 2 units.

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Answer #1

We need to compare these two ratios to satisfy the equimarginal principle. we see that the ratio of marginal utilities is greater than the ratio of prices. Therefore a greater utility is provided when there is an increase in the consumption of books comparatively to crayons. Hence Penelope can increase her utility by increasing her consumption of books and decreasing her consumption of crayons. Also note that the MRS should decline as more units of books are consumed. Correct choices are B and C.

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