Asked by Pablo Porcayo on Jun 26, 2024
Verified
Charlie's utility function is U(x, y) xy2.His marginal rate of substitution between x and y does not change if the amount of both goods doubles.
Marginal Rate of Substitution
The exchange rate between goods that allows a consumer to trade off one product for another without altering their overall happiness.
- Acquire understanding of how the marginal rate of substitution (MRS) correlates with the goods' price ratio.
Verified Answer
ZU
Zaheer UddinJun 27, 2024
Final Answer :
True
Explanation :
The fact that the marginal rate of substitution between x and y does not change when the amount of both goods doubles implies that the utility function exhibits constant marginal rate of substitution (MRS) or is a perfect substitute utility function. This means that the MRS is equal to a constant ratio, independent of the quantities consumed. In other words, the ratio of the marginal utility of x to the marginal utility of y remains constant. Therefore, the answer is true.
Learning Objectives
- Acquire understanding of how the marginal rate of substitution (MRS) correlates with the goods' price ratio.