Comparing the slope of the budget line(Opportunity Cost of Good Y) with the slopeof the Indifference Curve (Marginal Rate ofSubstitution) for a given bundle allowscomparison between the value of a good inconsumption vs. the value of the good inexchange.If the Opportunity Cost is greater than theMRS, the bundle cannot be optimal.Good X14B1230IC,BL,10Good Y At point A, the budget line is steeper than theindifference curve through A.At point A, the MRS is greater than theoportunity cost of good Y.If the person sold Y and bought X he couldmove from A to B on the budget line.If the person sold 2 units of Y he could buy 4units of X.O At point A, if the person gave up 2 units of Y hewould need 2 units of X to stay on the sameindifference curve.Because he could get 4 units of good X if hegave up 2 units Y in exchange and it onlyrequires 2 units of X to compensate him for theloss of 2 units of Y, point A cannot be utilitymaximizing.

Comparing the slope of the budget line (Opportunity Cost of Good Y) with the slope of the Indifference Curve (Marginal Rate of Substitution) for a given bundle allows comparison between the value of a good in consumption vs. the value of the good in exchange.

Comparing the slope of the budget line (Opportunity Cost of Good Y) with the slope of the Indifference Curve (Marginal Rate of Substitution) for a given bundle allows comparison between the value of a good in consumption vs. the value of the good in exchange.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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