Figure 22-10Refer to Figure 22-10.Bundle B represents a point where

Question

BlackTom AI · Accepted Answer

To analyze what Bundle B represents, we need to compare the consumer’s marginal rate of substitution (MRSxy) with the ratio of the goods' prices (Px/Py). - If MRSxy > Px/Py: the consumer values x relative to y more than the market does, meaning they would like to trade some y for more x at the given prices. In other words, they would substitute y for x to reach a higher, more preferred combination, indicating the current bundle is not at the optimal tangency with the budget line. - If MRSxy < Px/Py: the reverse holds—the consumer values y relative to x more than the market does, so they would substitute x for y to improve utility, again indicating a mismatch with the budget constraint. - If MRSxy = Px/Py: the indifference curve is exactly tangent to the budget line, and the bundle is at the optimum given the budget. - If the bundle lies inside the feasible region but not on the budget line due to a constraint, the MRS comparison alone may not determine optimality; you’d also consider whether the bundle is affordable and whether you can reach a higher indifference curve. Given the provided correct option text is: 'MRSxy > Px/Py', Bundle B must be a point where the consumer would prefer more x relative to y than their budget allows, i.e., the indifference-curve slope (MRS) is steeper than the budget line slope. This indicates a substitution motive toward x that the current bundle does not satisfy under the given prices. In contrast, if the statement were MRSxy = Px/Py, it would imply a perfect tangency and an optimal choice under the budget; if MRSxy < Px/Py, it would imply the opposite substitution direction. If a choice claimed something like 'MRSxy is unrelated to price ratios', that would be incorrect because the price ratio directly governs the trade-off at optimum, via the MRS condition for a Cobb-Douglas or smooth, locally linear indifference structure. Therefore, understanding Bundle B as having MRSxy > Px/Py aligns with the interpretation that the current mix of x and y would be improved by substituting toward x (relative to y) given the prices, which is consistent with the statement you provided.

Figure 22-10Refer to Figure 22-10.Bundle B represents a point where

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