An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket?
A) MRSxy is at a maximum.
B) Px/Py = money income.
C) MRSxy = money income.
D) MRSxy = Px/Py.
E) all of the above

Question

Quizplus · Accepted Answer

The utility-maximizing market basket occurs where the marginal rate of substitution (MRS) is equal to the ratio of prices, Px and Py. This means that the consumer is willing to give up a certain amount of one good (X) in exchange for the other (Y) at a rate that is equal to the market price ratio. Therefore, choice D, MRSxy = Px/Py, represents the utility maximizing market basket. Choices A, B, and C are incorrect because they do not involve the price ratio and/or do not necessarily represent the utility maximizing market basket.

An Individual Consumes Only Two Goods, X and Y