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

Micro Economics For Today
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ISBN:9781337613064
Author:Tucker, Irvin B.
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Chapter6: Consumer Choice Theory
Section6.A: Indifference Curve Analysis
Problem 3SQP
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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
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
Transcribed Image Text:(a) -y²/(P,P.) (b) –P/Pa (c) -Pa/Po (d) -y/(PaPs) (e) Pa/Pt
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Utility maximization occurs when marginal rate of substitution is equal to slope of the budget constraint.

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