[amp_mcq option1=”the total utility of the consumer is being maximised at this point” option2=”the total utility of the consumer will increase if he reallocates his expenditure leading to an increase in the amount of X and a reduction in the amount of Y” option3=”the total utility of the consumer will increase if he reduces his expenditure on both the commodities” option4=”the total utility of the consumer will increase if he reallocates his expenditure leading to an increase in the amount of Y and a reduction in the amount of X” correct=”option1″]<\/p>\n
The correct answer is: A. the total utility of the consumer is being maximised at this point.<\/p>\n
The marginal rate of substitution (MRS) is the rate at which a consumer is willing to give up one good in order to obtain more of another good. It is measured as the ratio of the marginal utility of the two goods.<\/p>\n
The budget constraint is the set of all combinations of goods that a consumer can afford given their income and the prices of the goods.<\/p>\n
At a point on the budget constraint where the MRS is equal to the price ratio, the consumer is in equilibrium. This is because the consumer is getting the same amount of utility from each additional unit of both goods.<\/p>\n
In this case, the MRS is 3 : 1 and the price ratio is 5 : 3. Therefore, the consumer is in equilibrium and their total utility is being maximized.<\/p>\n
If the consumer reallocates their expenditure leading to an increase in the amount of X and a reduction in the amount of Y, the MRS will be greater than the price ratio. This means that the consumer is getting more utility from each additional unit of X than they are from each additional unit of Y. This is not possible, as the consumer would have already chosen to consume more X and less Y if this were the case.<\/p>\n
If the consumer reduces their expenditure on both the commodities, the MRS will be less than the price ratio. This means that the consumer is getting less utility from each additional unit of X than they are from each additional unit of Y. This is not possible, as the consumer would have already chosen to consume less X and more Y if this were the case.<\/p>\n
Therefore, the total utility of the consumer will not increase if they reallocate their expenditure leading to an increase in the amount of X and a reduction in the amount of Y, or if they reduce their expenditure on both the commodities. The total utility of the consumer is being maximized at the point where the MRS is equal to the price ratio.<\/p>\n","protected":false},"excerpt":{"rendered":"
[amp_mcq option1=”the total utility of the consumer is being maximised at this point” option2=”the total utility of the consumer will increase if he reallocates his expenditure leading to an increase in the amount of X and a reduction in the amount of Y” option3=”the total utility of the consumer will increase if he reduces his … <\/p>\n