380 Quiz 3-answers

380 Quiz 3-answers - describe the graphical solution in 3....

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Quiz 3 Econ 380 W2011 Name_____Key______________ 1. The consumer problem is to Maximize__utility__________________________ subject to the _budget constraint______________________________. 2. Show graphically the set of feasible choices (bundles) the consumer might make (y on the vertical axis and x on the horizontal one). y x 3. Graph the consumer equilibrium (optimum) on the interior of 2 R + . That is where in the set of feasible choices is the optimum (put y on vertical axis and x on the horizontal)? y \ x slope of budget constraint=slope of indifference curve. 4. Describe that optimum using jargon and symbols we have developed. That is, how can we
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Unformatted text preview: describe the graphical solution in 3. more precisely? The marginal rate of substitution, MRS is the marginal benefit of consuming x (measured in units of y) and the relative price of x, / x y p p is the marginal cost of x (measured in units of y). The MRS can also be written MU x /MU y . Hence, the equilibrium in 3. can be written MU x /p x =MU y /p y as well meaning that the marginal benefit per dollar spent on x should be equal to the marginal benefit per dollar spent on y. Budget set budget line MRS=p x /p y Indifference curve...
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