Suppose a consumer consumes two goods, X and Y. The relative price of the two goods equals the
A)marginal rate of substitution.
B)rate at which the consumer will give up X to gain Y while maintaining the same level of utility.
C)slope of the budget constraint.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The relative price of the two goods is determined by the slope of the budget constraint, which shows the tradeoff between the two goods at a given income level. The marginal rate of substitution (MRS) is the rate at which the consumer is willing to trade one good for another while maintaining the same level of utility, and it can be represented by the slope of the indifference curve. While the relative price and MRS are related, they are not the same thing, so choice A is incorrect. Choice B is similar to the definition of MRS, but it does not capture the broader relationship between the two goods at different price levels. Therefore, the correct answer is C, which explicitly links the relative price to the budget constraint.

Suppose a Consumer Consumes Two Goods, X and Y