Candies are on the vertical axis and pretzels are on the horizontal axis.Both goods command a positive price in the market place.The indifference curves are shaped such that the marginal rate of substitution increases rather than decreases.At equilibrium,the consumer will:
A)consume both pretzels and candy in the ratio of their prices.
B)consume only pretzels or only candy.
C)consume both pretzels and candy in the ratio of their marginal utilities.
D)consume equal amounts of pretzels and candy.

Question

Quizplus · Accepted Answer

In typical consumer theory, the marginal rate of substitution (MRS) decreases as one moves along an indifference curve due to diminishing marginal utility. However, if the MRS increases rather than decreases, it implies that the consumer values one additional unit of a good increasingly more as they consume more of it relative to the other good. This unusual shape of indifference curves suggests that the consumer would specialize in consuming only one of the goods (either pretzels or candy) to maximize utility, as there's an increasing incentive to substitute one good for the other. This leads to corner solutions on the indifference curve, where the consumer chooses to consume only one of the goods.

Candies Are on the Vertical Axis and Pretzels Are on the Horizontal