Chapter 1. eFigure 4.18

100

Correct! Comparing bundles A and B, we find that the consumer purchased too much Y and too little X at point B relative to point A. Along the y-axis, point B measures a larger quantity of Y than point A, and along the x-axis point B measures a smaller quantity of X than point A. Accordingly, to increase her utility and move to point A (from point B), the consumer should cut back on the amount of Y purchased and buy additional units of X.

Incorrect. Comparing bundles A and B, we find that the consumer purchased too much Y and too little X at point B relative to point A. Along the y-axis, point B measures a larger quantity of Y than point A, and along the x-axis point B measures a smaller quantity of X than point A. Accordingly, to increase her utility and move to point A (from point B), the consumer should cut back on the amount of Y purchased and buy additional units of X.

100

Correct! At point D the consumer is inside her budget constraint, meaning that she has not exhausted her budget and still has money left to spend. Since we assume that her utility is only derived from goods X and Y, and not from putting money in a savings account, the unspent money prevents her from maximizing her utility. At point A, she has exhausted her budget and maximized her utility.

Incorrect. At point D the consumer is inside her budget constraint, meaning that she has not exhausted her budget and still has money left to spend. Since we assume that her utility is only derived from goods X and Y, and not from putting money in a savings account, the unspent money prevents her from maximizing her utility. At point A, she has exhausted her budget and maximized her utility.

100

Correct! Since good X is twice as expensive as good Y, it must also provide twice as much utility in order for the marginal utility per dollar to be equated across the two goods. Specifically, MU_X must be equal to 2MU_Y. This ensures that the consumer is maximizing her utility.

Incorrect. Since good X is twice as expensive as good Y, it must also provide twice as much utility in order for the marginal utility per dollar to be equated across the two goods. Specifically, MU_X must be equal to 2MU_Y. This ensures that the consumer is maximizing her utility.

100

Correct! The inequality MU_X/P_X > MU_Y/P_Ydescribes a point where the sope of the indifference curve exceeds the slope of the budget constraint. That is, MU_X/MU_Y > P_X/P_Y. In the graph, the labeled point at which the slope of the indifference curve exceeds that of the budget constraint is point B. In addition, we know that at point B the consumer has consumed too much Y (lowering the marginal utility per dollar) and too little X. Thus is makes intuitive sense that the marginal utility per dollar is greater for good X than for good Y.

Incorrect. The inequality MU_X/P_X > MU_Y/P_Ydescribes a point where the sope of the indifference curve exceeds the slope of the budget constraint. That is, MU_X/MU_Y > P_X/P_Y. In the graph, the labeled point at which the slope of the indifference curve exceeds that of the budget constraint is point B. In addition, we know that at point B the consumer has consumed too much Y (lowering the marginal utility per dollar) and too little X. Thus is makes intuitive sense that the marginal utility per dollar is greater for good X than for good Y.