Question

Which of the following statements for EVAN iTRUE?

I. If EVAN views MANGOS and Orange as perfect substitute (U= 2X +3Y ) then he will only consume the good with the lowest price.

II. If HE views MANGOS and Orange as perfect substitute (U = 5X + 6Y) then he will consume some quantity of both goods if

Answer 1

1) False . The consumption bundle will depend on Marginal rate of substitution and price ratio.
In this example utility function is given by U= 2X +3Y. So
MRS= (MUx / MUY)
= (2/3)
Now let us assume Px = 4 and PY = 5 (price of good X is lower)
= MRS (2/3) < (Px / PY ) = (4/5)
Therefore consumer will buy only good Y as MRS < (Px / PY ) even when Y is expensive as compared to X.

2) The person will consume both goods if MRS = (Px / PY )
In this example utility function is given by U= 5X + 6Y So
MRS= (MUx / MUY)
= (5/6)
Now (Px / PY ) should be equal to  (5/6) then only Evan will consume both goods