The relative price rule says that at the optimal consumption bundle the marginal rate of substitution between two goods must be equal to their relative price.This is equivalent to saying that:
A)the marginal utility per dollar is the same for both goods.
B)the marginal utility of each good consumed must be the same.
C)goods should be consumed in the same ratio as their relative
D)price.the MRS is not equal to the ratio of marginal utilities.

Question

Quizplus · Accepted Answer

The relative price rule is based on the concept of equalizing the marginal utility per dollar spent on each good, which means that the consumer is getting the same level of satisfaction from each additional dollar spent on those goods. This is only possible when the marginal rate of substitution between the two goods is equal to their relative price. Therefore, option A is the correct choice. Options B and C are incorrect because they suggest equal marginal utility or equal consumption ratios, which are not necessary for the relative price rule. Option D is also incorrect because if the MRS is not equal to the ratio of marginal utilities, then the consumer is not maximizing utility.

The Relative Price Rule Says That at the Optimal Consumption