Question

If the optimum bundle is a "corner solution" on the budget constraint then which statement must be true? Let's say you buy all of good X on the x-axis if you want to draw the graph...which is a good idea.

A. You get no utility from the good on the y-axis.

B. The price is too high for good on the y-axis.

C. You get more utility from the last unit of good X than the first unit of the good on the y-axis.

D. Your indifference curves are straight lines and the two goods are perfect substitutes.

Answer 1

option d is the correct option here.

because if the indifference curves were of normal convex shape then there would be no corner solution.

here the graph would look like this:

here let's say the budget line is the red one here which represents our income. and good x and Y are perfect substitutes and their MRS is always>Px/Py hence the MUx/Px>MUy/Py that means each dollar spent on good X will always give better returns in terms of utility hence the consumer would spend all of his income on good x and the consumer equilibrium will be set on point E.

the green budget line is something the consumer cannot afford.

Give this answer a thumbs up. if you have ay doubts please ask me in the comments.