Question

You are currently consuming bundle A. At the point corresponding to bundle A in the (x,y)...

You are currently consuming bundle A. At the point corresponding to bundle A in the (x,y) plane, the indifference curve is steeper than the budget constraint. What should you do (if you can)?

Impossible to know from this information

Nothing

Trade some Y for X

Trade some X for Y

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Answer #1

If at the point corresponding to bundle A in the (x,y) plane, Indifference Curve is steeper than budget constraint. It means the Slope of Indifference Curve is Greater than Slope of Budget Constraint. Slope of Indifference Curve is Marginal Rate of Substitution(MRSxy). Slope of Budget Constraint is Negative of Ratio of Price of Good x and Price of good y. For consumer to be in Equilibrium, MRSxy= Px/Py.

Now If Slope of Indifference Curve(MRSxy)> Slope of Budget Constraint (Px/Py), then the consumer would Increase the Consumption of good X and Decrease the consumption of good Y which would Decrease MRSxy upto the point where MRSxy= Px/Py.

Thus, the consumer will trade some Y for X.

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