Question

1a) According to Cardinal utility theory, at the utility maximizing equilibrium combination for two goods, X and Y, which of the following must be TRUE?

1. The marginal utility per dollar spent on X will exceed the marginal utility per dollar
   1. spent on Y.
2. The total expenditure will be the same for each good.
3. The marginal utility per dollar from X equals the marginal utility per dollar from Y.

4. The marginal utility will be the same for each good.

1B) In Ordinal theory, consumer equilibrium (utility maximization) occurs

1. where the consumer spends all of his income on one good.
2. where the consumer spends half of his income on each good.
3. where the budget constraint is tangent to the highest possible indifference curve.
4. where the budget constraint intersects the indifference curve.

1C) Which of the following best defines the term “Indifference Curve”?

1. Shows the various combinations of two goods that provide the same level of utility to a consumer.

2. Shows the various combinations of two goods that a consumer can purchase, given the market prices of the goods, and the level of income.

3. Illustrates the relationship between a consumer’s total utility and the various levels of consumption for a single good.

4. Shows the relationship between market price and quantity demanded, ceteris paribus.

Answer 1

1 A) The marginal utility per dollar from X equals the marginal utility per dollar from Y. The consumer maximised utility when marginal utility per dollar received from both goods are same.

1B) where budget constraint is tangent to highest possible indifference curve. Higher indifference curve represent higher satisfaction. Therefore, consumer maximises it's utility at highest possible indifference curve with the given budget constraint.

1C) Shows various combinations of two goods that provide the same level of utility to a consumer. Indifference curve represents a consumer's satisfaction or utility. Any point on the indifference curve shows various combinations of two goods that give same level of satisfaction.