Chat with AI
Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder
Edition 12ISBN: 978-1133189022Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder
Edition 12ISBN: 978-1133189022 Exercise 36
As we showed in this chapter, utility maximization requires that a person equate the marginal rate of substitution (MRS) to the ratio of the goods' prices (P X /P Y ). When asked to explain the reasoning behind this condition, students gave the following answers:
Student A: Because the MRS shows the ratio of good Y to good X that this person wishes to consume, he or she must equate this ratio to the price ratio because the price ratio shows how much Y he or she can buy if one less X is bought.
Student B: Because the MRS shows how this person is willing to trade good X for good Y he should choose prices that also reflect this ratio.
Student C: Because the MRS shows how this person is willing to trade good X for good Y, he or she must adjust purchases so that this ratio is equal to the ratio of the goods' prices.
Which of these students is stating the result correctly? What errors are the other two making?
Student A: Because the MRS shows the ratio of good Y to good X that this person wishes to consume, he or she must equate this ratio to the price ratio because the price ratio shows how much Y he or she can buy if one less X is bought.
Student B: Because the MRS shows how this person is willing to trade good X for good Y he should choose prices that also reflect this ratio.
Student C: Because the MRS shows how this person is willing to trade good X for good Y, he or she must adjust purchases so that this ratio is equal to the ratio of the goods' prices.
Which of these students is stating the result correctly? What errors are the other two making?
Explanation
Verified
Verified
Out of the three students, Student A has...
Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder
Why don’t you like this exercise?
Other Minimum 8 character and maximum 255 character
Character 255
