Question   4. A consumer suddenly realizes that \( M U_{x} / P_{x}<M U_{y} / P_{y} \) with his current commodity bundle. Is he maximizing his utility? If not, which commodity should he consume more of , to improve utility, without increasing total expenditure? What happens to the MU/P ratio for each good as he begins to adjust consumption? ( 20 marks)

WV6CTA The Asker · Economics

 

Transcribed Image Text: 4. A consumer suddenly realizes that \( M U_{x} / P_{x}
More
Transcribed Image Text: 4. A consumer suddenly realizes that \( M U_{x} / P_{x}
Community Answer
ZA9SIQ

&#12304;General guidance&#12305;The answer provided below has been developed in a clear step by step manner.Step1/3No, The consumer is not maximizing his utility if\( \mathrm{\frac{{{M}{U}_{{{x}}}}}{{p}_{{{x}}}}\lt\frac{{{M}{U}_{{y}}}}{{P}_{{y}}}} \)with his current commodity bundle. According to this inequality, the marginal utility per unit of money spent on good Y is likely higher than the marginal utility per unit of money spent on good X.In order to increase utility without increasing overall expenditure, the consumer should consume more of good X, which has a lower marginal utility per unit of money spent. The consumer will increase their overall utility by reallocating a part of their budget from Y to X.Explanation:Please refer to solution in this step.Step2/3The \( \mathrm{\frac{{{M}{U}}}{{P}}} \) ratio for each good will vary when the user starts to adjust consumption. The \ ... See the full answer