Explain why the equimarginal rule is a necessary condition for utility maximization.
What will be an ideal response?
The easiest way to explain this is to consider what would happen if the marginal benefit per dollar spent on good X were not equal to the marginal benefit per dollar spent on good Y. Suppose that the marginal benefit per dollar spent on good X exceeds the marginal benefit per dollar spent on good Y. Then the consumer could spend one fewer dollar on Y and one more dollar on X and still be within her budget constraint. She would lose utility equal to approximately "the marginal benefit of good Y / the price of good Y," but would gain utility equal to approximately "the marginal benefit of good X / the price of good X." Since the latter is greater than the former, total utility would increase. Therefore utility could not have been maximized before. A similar argument holds when the marginal benefit per dollar spent on good X is smaller than the marginal benefit per dollar spent on good Y.
You might also like to view...
Refer to Figure 13.2. If Oliver's political views place him at the L4 position and George's political views place him at the C4 position,
Oliver will definitely receive at least ________ votes and George will definitely receive at least ________ votes. A) 4; 4 B) 4; 5 C) 5; 4 D) 5; 5
Requiring a firm with international operations to follow the standards of its home country instead of those of the foreign country has all of the following advantages EXCEPT
A) it takes care of the fear of a race-to-the-bottom by making it impossible for a home-based company to exploit low standards.
B) it shifts the costs of improved standards to firms and consumers in high-income countries.
C) it removes the threat of domestic firms relocating abroad for low standards and ensures that any relocation that takes place is due to foreign comparative advantage.
D) it avoids the problems of high-income countries dictating what standards are to be used. In this situation, firms that cross national boundaries must conform to whichever standards are higher.
E) it is a comprehensive measure, since it addresses the problem of production in foreign firms as well as firms from high-standards countries that relocate abroad.
Which of the following is true of Chow test?
A. It is a type of t test. B. It is a type of sign test. C. It is only valid under homoskedasticty. D. It is only valid under heteroskedasticity.
If the exchange rate falls, domestic goods become relatively ______ expensive. This change in the affordability of domestic goods makes domestic goods _____ attractive to domestic residents. So, _______ ______
Fill in the blank(s) with correct word