If a consumer allocates her income between two goods,x and y,then she will be in equilibrium when A) MU_x/P_x = MU_y/P_y and she is below her budget constraint B) MU_x = MU_y and she has spent all of her income C) MU_x/MU_y P_x/P_y and all of her income is spent D) MU_x/P_x = MU_y/P_y and all of her income is spent E) MU_x = MU_y and she is below her budget constraint

Question

If a consumer allocates her income between two goods,x and y,then she will be in equilibrium when A) MU_x/P_x = MU_y/P_y and she is below her budget constraint B) MU_x = MU_y and she has spent all of her income C) MU_x/MU_y > P_x/P_y and all of her income is spent D) MU_x/P_x = MU_y/P_y and all of her income is spent E) MU_x = MU_y and she is below her budget constraint

Quizplus · Accepted Answer

In order to be in equilibrium, the consumer must maximize her utility subject to her budget constraint. This means that the marginal utility per dollar spent on each good must be equal. Thus, MU_x/P_x = MU_y/P_y. Additionally, since she has allocated all of her income, all of her income is spent, making choice D the correct answer.

If a Consumer Allocates Her Income Between Two Goods,x and Y,then