A consumer has preferences over two goods,X and Y.Suppose we graph this consumer's preferences (which satisfy the usual properties of indifference curves)and budget constraint on a diagram with X on the horizontal axis and Y on the vertical axis.At the consumer's current consumption bundle,the consumer is spending all available income,and the marginal rate of substitution is greater than the slope of the budget constraint.We can conclude that the consumer
A) is currently maximizing satisfaction.
B) could increase satisfaction by consuming more X and less Y.
C) could increase satisfaction by consuming less X and more Y.
D) could purchase more X and more Y and increase total satisfaction.

Question

Quizplus · Accepted Answer

If the marginal rate of substitution is greater than the slope of the budget constraint, it means that the consumer can give up some units of Y for more units of X and still be at the same level of satisfaction. Therefore, the consumer can increase satisfaction by consuming more X and less Y. This would shift the consumption bundle to a higher indifference curve that is still tangent to the budget constraint. Since the consumer is spending all available income, option D is not feasible. And, we cannot conclude whether the consumer is currently maximizing satisfaction without knowing the shape of the indifference curves and the budget constraint. Option C is incorrect because in this case, the slope of the budget constraint would have to be greater than the marginal rate of substitution which is not the case.

A Consumer Has Preferences Over Two Goods,X and Y