If a consumer views the two goods they consume as perfect substitutes, the optimal bundle will be a corner solution. Explain
What will be an ideal response?
Perfect substitutes are goods for which at any point you will trade one good in the same proportion for the other. The specific utility function is U(x,y) = ax + by, and the ICs are linear throughout.
A corner solution is when the optimal bundle is all of one good and none of the other (i.e. the solution is at the intercept of the BC and one of the axes).
True, since the MRS is constant for p.s.'s, the optimal bundle will occur at a corner
You might also like to view...
An economy is in long-run equilibrium when output equals potential output. Why is there no long-run equilibrium rate of "potential inflation"?
What will be an ideal response?
Why do investors engage in arbitrage?
What will be an ideal response?
To maximize utility consumers should buy goods and services to the point where the marginal utility of each item consumed is maximized
Indicate whether the statement is true or false
Which of the following may be sacrificed when pursuing growth policies?
a. Environmental regulations and air quality b. Anti-monopoly, pro-competitive legislation c. Safety net programs such as food stamps d. All of the above e. Technological progress