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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

What is the rule relating the ratio of marginal utility to prices of two goods at the optimal choice? Explain why, if this rule does not hold, the choice cannot be utility-maximizing

To determine

The rule that is related to the ratio of marginal utility to prices of two goods at the optimal choice. And the reason the choice cannot be utility- maximizing if this rule does not hold.

Explanation

The rule relating the ratio of marginal utility to prices of two goods at the optimal choice is

MU1/MU2 = P1/P2.

Where, MU1 is the marginal utility of one good.

MU2 is the marginal utility of another good.

P1 is the price of one good.

P2 is the price of another good.

This means that the rule is that the marginal utility per unit for both the goods must be same or the ratio of utilities between the two goods should be equal to 1...

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