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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406

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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

Is there a logical link between the law of demand and the assumption that individuals seek to maximize utility? (Hint: Think of how the condition for consumer equilibrium can be used to express the inverse relationship between price and quantity demanded.)

To determine

Explain the link between the law of demand and the assumption of maximize utility.

Explanation

According to the law of demand, other things being equal, the price and quantity demanded have an inverse relation; when the price rises, the quantity demanded will decrease and vice versa. There is a link between this law of demand and the assumption about the maximizing utility. According to the utility maximizing rule, in a two good world, the consumer equilibrium occurs at the point where the marginal utility–price ratio for one of the goods is equal to the ratio of the other good. It can be represented as follows:

MUXPX</

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