Economics
Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
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Chapter 10, Problem 14P
To determine

Concept introduction:

Budget Line: It is defined as the combination of all the goods that a consumer can purchase, exhausting all his income. The formula for the budget line is:

M=XPX+YPy

Here,

    X is the quantity of good X.

    Y is the quantity of good Y.

    M is the total income.

    Px is the price of good X.

    Py is the price of good Y.

Marginal Utility: It is defined as the change in the total utility due to a change in an additional unit of a good. It may be diminishing, increasing, or constant.

MU=TUNTUN1 or MU=ΔTUΔX

Here,

    MU is the marginal utility.

    TU is the total utility.

    • X is the quantity of any good.

    • N is the number of goods.

Marginal Utility per dollar: It is the ratio of the marginal utility to that of the price of the good.

MU$=MUPX

Here,

    MU$ is the marginal utility per dollar.

    Px is the price of x

Maximizing utility in the case of two goods: It states that the equilibrium level of consumption of the two goods for a consumer is achieved when the Marginal Utility per dollar of the two goods are equal. This means that the following conditions must be fulfilled:

MUXPX=MUYPY

Here,

    MUX is the marginal utility of good X.

    MUY is the marginal utility of good Y.

    Px is the price of good X.

    Py is the price of good Y.

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