25. Imagine a consumer who spends her income (y) entirely on apples and ba- nanas. Apples are plotted on the horizontal axis, bananas on the vertical. Let Pa and P, denote the prices of apples and bananas. At an interior solution to the consumer's utility-maximization problem, the consumer's marginal rate of substitution is
25. Imagine a consumer who spends her income (y) entirely on apples and ba- nanas. Apples are plotted on the horizontal axis, bananas on the vertical. Let Pa and P, denote the prices of apples and bananas. At an interior solution to the consumer's utility-maximization problem, the consumer's marginal rate of substitution is
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
![25. Imagine a consumer who spends her income (y) entirely on apples and ba-
nanas. Apples are plotted on the horizontal axis, bananas on the vertical. Let
Pa and P, denote the prices of apples and bananas. At an interior solution to
the consumer's utility-maximization problem, the consumer's marginal rate
of substitution is](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcef9a6ff-9609-4f39-bbda-860a4e78ef7d%2F1635ed8a-18be-46ec-bdf5-c2580c9437be%2F81hh1d_processed.jpeg&w=3840&q=75)
Transcribed Image Text:25. Imagine a consumer who spends her income (y) entirely on apples and ba-
nanas. Apples are plotted on the horizontal axis, bananas on the vertical. Let
Pa and P, denote the prices of apples and bananas. At an interior solution to
the consumer's utility-maximization problem, the consumer's marginal rate
of substitution is
![(a) -y²/(P,P.)
(b) –P/Pa
(c) -Pa/Po
(d) -y/(PaPs)
(e) Pa/Pt](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcef9a6ff-9609-4f39-bbda-860a4e78ef7d%2F1635ed8a-18be-46ec-bdf5-c2580c9437be%2F3aofa0h7_processed.jpeg&w=3840&q=75)
Transcribed Image Text:(a) -y²/(P,P.)
(b) –P/Pa
(c) -Pa/Po
(d) -y/(PaPs)
(e) Pa/Pt
Expert Solution
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Introduction
Utility maximization occurs when marginal rate of substitution is equal to slope of the budget constraint.
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