The price of X is $20 and the price of Y is $40.

-Based on the above graph,how many units of X will the consumer choose if point B is the utility-maximizing choice?
A)28
B)30
C)32
D)60
E)none of the above

Question

The price of X is $20 and the price of Y is $40.

-Based on the above graph,how many units of X will the consumer choose if point B is the utility-maximizing choice?
A)28 
B)30 
C)32 
D)60 
E)none of the above

Quizplus · Accepted Answer

The consumer will choose the bundle of goods that lies on the highest possible indifference curve and still fits within their budget constraint. At point B, the consumer's budget constraint is tangent to indifference curve I2, meaning the slope of the budget constraint (the ratio of the prices of X and Y) equals the slope of the indifference curve (the marginal rate of substitution between X and Y). Therefore, the consumer is buying the goods in the ratio of their prices: 1 unit of Y for every 0.5 units of X. Since the budget is $120, the consumer can buy 3 units of Y (at $40 each) and 48 units of X (at $20 each), for a total of 32 units of X.

The Price of X Is $20 and the Price of Y