When there are two goods (X and Y), the consumer's optimum is typically found by locating the basket where the marginal value of X in terms of Y equals PX/PY. Explain in words what this equality means, and describe two situations where the consumer's optimum is not characterized by this equation.
What will be an ideal response?
The marginal value of X measures the amount of good Y that the consumer is just willing to accept in exchange for 1 unit of good X. Put more simply, marginal value is the additional value that the consumer receives from the last unit of good X. The term PX/PY is the relative price of good X in terms of good Y; this value represents the amount of good Y that the consumer would receive from the market in exchange for 1 unit of good X. The equality therefore says that the consumer has reached the highest level of satisfaction possible under his budget constraint when the value he places on the marginal unit of good X is the same as the value that the market places on good X. This equation will not hold at the optimum, however, if there is a corner solution (i.e., the consumer chooses not to purchase one of the two goods) or if the consumer's indifference curves are concave (i.e., the indifference curves do not have the standard convex shape and are instead bowed away from the origin).
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Which is the correct sequence? Explain.
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B) the demand for tea decreases.
C) the demand for tea increases.
D) the supply of tea decreases.
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a. Short-term deposits b. Reserve assets. c. Long-term government securities. d. Loans to companies with low credit ratings. e. Long-term savings deposits.