a) Suppose a household is faced with the choice between consuming gasoline (G) and all other goods (OG). Today the household consumes 800 liter of gasoline a year. Suppose then that a gasoline price increase is perfectly compensated by a wage increase. If the family followed the utility maximization model, how would this affect their consumption of gasoline? Explain by using a figure. b) Explain by using an example why an MRS (Marginal Rate of Substitution) between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction?
a) Suppose a household is faced with the choice between consuming gasoline (G) and all other goods (OG). Today the household consumes 800 liter of gasoline a year. Suppose then that a gasoline price increase is perfectly compensated by a wage increase. If the family followed the utility maximization model, how would this affect their consumption of gasoline? Explain by using a figure. b) Explain by using an example why an MRS (Marginal Rate of Substitution) between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction?
Micro Economics For Today
10th Edition
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter6: Consumer Choice Theory
Section: Chapter Questions
Problem 19SQ
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a) Suppose a household is faced with the choice between consuming gasoline (G) and all other goods (OG). Today the household consumes 800 liter of gasoline a year.
Suppose then that a gasoline price increase is perfectly compensated by a wage increase. If the family followed the utility maximization model, how would this affect their consumption of gasoline? Explain by using a figure.
b) Explain by using an example why an MRS (Marginal Rate of Substitution) between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction?
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