Question

# A wealthy consumer's preferences are strictly convex and his demand for good X (disinfectant wipes) is...

A wealthy consumer's preferences are strictly convex and his demand for good X (disinfectant wipes) is independent of his income and given by

X = 60.9 - 3.7 Px/Py

where Px and Py are respectively the price of good X and the price of good Y.

Suppose prices are such that the consumer buys 5 units of good X in order to maximize his utility. What is the consumer's marginal rate of substitution (of good X in terms of good Y) equal to?

The Marginal Rate of Substitution is defined as the amount of one good the consumer is willing to give up to get one additional unit of another good and maintain the same level of satisfaction.

In this case, consumer's preferences are strictly convex which implies the MRS is equal to the price ratio.

MRSXY = Price of X / Price of Y

that is, the slope of the indifference curve is equal to the slope of the budget line.

Given X = 60.9 - 3.7 Px / Py

5 = 60.9 - 3.7 Px / Py

Px / Py = 60.9 - 5 / 3.7 = 55.9 / 3.7 = 56/4 = 14

As, MRSXY = Price of X / Price of Y

therefore, Consumer's MRSXY = 14:1

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Need Online Homework Help?

Most questions answered within 1 hours.

##### Active Questions
• Distinguish between the typical roles of geologist and engineers in dealing with groundwater problems. How do...
• 5) A rock is thrown directly southeast (45 degrees to S and E), at an initial...
• If 133.2 kJ of heat are added to 5.80 × 102 g of water at 22.0°C,...
• true/false An unweighted path length measures the number of edges in a graph. Breadth first search...
• Give an example of the effect of interest rate changes on a fixed coupon bond, what...
• Thirty-two small communities in Connecticut (population near 10,000 each) gave an average of x = 138.5...