Chapter 7, Problem 1VQP

To determine

The utility maximization and the law of demand.

Explanation of Solution

The utility maximization is consistent with the law of demand. Assume that a bundle of goods X and Y is the utility-maximizing quantity of consumer and is currently in equilibrium. It can be expressed as MUx/Px = MUy/Py. As per the law of demand, there is a decrease in the quantity demanded as the price increases. Suppose the price of good X falls, MUx/Px > MUy/Py. Then, there is an increase in the demand for good X due to an increase in utility from that good. On the other hand, if there is an increase in the price of good X, then there is a corresponding decrease in the demand for good X. Therefore, the utility maximization is consistent with the law of demand.

Economics Concept Introduction

Law of demand: The law of demand explains the negative relation between price and quantity demanded, that is a higher price associated with a lower quantity demanded.