Use the figure below to answer the following questions. Figure 9.3.1
-Consider the budget line and indifference curve in Figure 9.3.1.If the price of good X is $1 a unit,then the price of good Y is
A)$0.75 a unit.
B)$1 a unit.
C)$1.25 a unit.
D)$2 a unit.
E)$1.33 a unit.

Question

Use the figure below to answer the following questions.  Figure 9.3.1
-Consider the budget line and indifference curve in Figure 9.3.1.If the price of good X is $1 a unit,then the price of good Y is
A)$0.75 a unit. 
B)$1 a unit. 
C)$1.25 a unit. 
D)$2 a unit. 
E)$1.33 a unit.

Quizplus · Accepted Answer

The slope of the budget line is -1/Px/Py. Since the price of good X is $1 a unit, the slope of the budget line is -1/1/Py. The indifference curve is tangent to the budget line at point A. At this point, the marginal rate of substitution (MRS) of good X for good Y is equal to the price ratio, Px/Py. The MRS is the slope of the indifference curve. The slope of the indifference curve at point A is -1/MRS. Therefore, -1/MRS = -1/1/Py. Solving for Py, we get Py = MRS. The MRS at point A is 0.75. Therefore, Py = 0.75.

Use the Figure Below to Answer the Following Questions