Question

Which of the following properties characterizes the consumption bundle selected by an optimizing consumer?

1) the ratio of total utilities is equal to the relative price.
2) the ratio of income to price equals the marginal rate of substitution.
3) the marginal rate of substitution is equal to the relative price.
4) the marginal rate of substitution is equal to income.

Answer 1

The consumption bundle selected by an optimizing consumer is characterized by the marginal rate of substitution being equal to the ratio of prices of the goods in the bundle. The MRS represents the willingness of the consumer to give up one good in exchange for another while maintaining the same level of satisfaction.

Step-by-step explanation:

The consumption bundle selected by an optimizing consumer is characterized by several properties. One of these properties is that the marginal rate of substitution (MRS) is equal to the ratio of prices of the two goods in the bundle. The MRS represents the willingness of the consumer to give up one good in exchange for another while maintaining the same level of satisfaction.

For example, if a consumer is willing to give up 3 units of good A in exchange for 2 units of good B, and the price ratio of A to B is 2:3, then the MRS is equal to the price ratio.

However, it is important to note that the statement in the question stating that the MRS is equal to income is incorrect. The MRS is a measure of how the consumer values one good relative to another, not related to income.