Suppose there are 10 apples and 10 oranges in the economy. Joe is currently consuming 4 apples and 5 oranges, and Jane is consuming 6 apples and 5 oranges. At this allocation, Joe's marginal utility of apples is 3, and his marginal utility of oranges is 5. Jane's marginal utility of apples is 6, and her marginal utility of oranges is 10. If the current price of apples is $4 and the current price of oranges is $5, then there is an:
A) excess demand for apples and an excess supply of oranges.
B) excess demand for oranges and an excess supply of apples.
C) equilibrium in the market with no excess supply or demand for either good.
D) excess supply of apples and oranges.

Question

Quizplus · Accepted Answer

According to the law of demand, consumers will demand more of a good as its price decreases. Since Joe's marginal utility of apples is 3, which is less than the price of $4, he will not purchase any more apples. This suggests that there is an excess supply of apples. Similarly, Jane's marginal utility of apples is 6, which is greater than the price of $4, so she will continue purchasing apples. This indicates that there is an excess demand for oranges. Finally, since there is no excess supply or demand for oranges, the best choice is B, indicating excess demand for oranges and excess supply of apples.

Suppose There Are 10 Apples and 10 Oranges in the Economy