Ch 4 Textbook Ed 3 Solutions (1)

# Ch 4 Textbook Ed 3 Solutions (1) - Besanko Braeutigam...

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Besanko & Braeutigam – Microeconomics, 3 rd editionSolutions Manual “bang for the buck” condition will not hold. This condition states that at the optimum the extra utility gained per dollar spent on good x must be equal to the extra utility gained per dollar spent on good y . If this condition does not hold at the chosen basket, then the consumer could reallocate his income to purchase more of the good with the higher “bang for the buck” and increase his total utility while remaining within the given budget. Thus, if these slopes are not equal the basket cannot be optimal assuming an interior solution. 6. At an interior optimum, the slope of the budget line must equal the slope of the indifference curve. This implies y x y x y x P P MU MU MRS = = , This can be rewritten as y y x x P MU P MU = which is known as the “bang for the buck” condition. If this condition does not hold at the chosen interior basket, then the consumer can increase total utility by reallocating his spending to purchase more of the good with the higher “bang for the buck” and less of the other good.
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