A consumer has preferences over two goods, X and Y. Suppose we graph this consumer's preferences (which satisfy the usual properties of indifference curves) and budget constraint on a diagram with X on the horizontal axis and Y on the vertical axis. At the consumer's current consumption bundle, the consumer is spending all available income, and the marginal rate of substitution is greater than the slope of the budget constraint. We can conclude that the consumer
A)is currently maximizing satisfaction subject to the budget constraint.
B)could increase satisfaction by consuming more X and less Y.
C)could increase satisfaction by consuming less X and more Y.
D)could purchase more X and more Y and increase total satisfaction.

Question

Quizplus · Accepted Answer

The fact that the marginal rate of substitution is greater than the slope of the budget constraint means that the consumer can still increase satisfaction by consuming more X and less Y. This is because the consumer would be willing to give up more Y for each additional unit of X consumed, which means they are not yet at their optimal consumption bundle. Therefore, the consumer can increase satisfaction by moving to a consumption bundle that lies on a higher indifference curve but still within their budget constraint, and this is achieved by consuming more X and less Y.

A Consumer Has Preferences Over Two Goods, X and Y