Question

Which of the following assumptions on preferences leads to an interior solution to the consumer choice problem (i.e., one in which the optimal consumption choice involves some of each good)?

1) discrete goods
2) a good and a bad
3) perfect complements
4) strictly concave preferences
5) concave preferences
6) perfect substitutes
7) definitely yes
8) definitely no
9) possible

Answer 1

Strictly concave preferences lead to an interior solution in the consumer choice problem, enabling consumers to achieve optimal satisfaction by consuming some of each good.

Step-by-step explanation:

The assumption that leads to an interior solution to the consumer choice problem, where the optimal consumption choice involves some of each good, is strictly concave preferences. When preferences are strictly concave, consumers experience diminishing marginal utility, implying that they get less additional satisfaction from consuming each additional unit of a good. Consequently, they prefer a combination of goods rather than all of one and none of the other. This contrasts with perfect substitutes (where consumers are indifferent between combinations of two goods as long as the total utility is the same) and perfect complements (where consumers only consume goods in fixed ratios).