indifference curves and budget constraint

CFA Level I
#1

please refer to Economics–> study session 4–> reading 14–> practice problems No.5 why C is incorrect?

#2

Two reasons:

  1. They have good x and good y reversed: the maximum utility occurs when the marginal rate of substitution = price(x) / price(y).
  2. Every indifference curve will have a point where the marginal rate of substitution = price(x) / price(y), so that criterion isn’t sufficient. Maximum utility occurs specifically on the indifference curve that is tangent to the budget constraint line (and, at that tangency point, the marginal rate of substitution = price(x) / price(y)).
#3

Schweser or CFAI curriculum? 2015? lol. what I see is a problem about giffen goods…

#4

I took it as the 2015 CFA Institute curriculum, v. 2, p. 92.

#5

I got it.

Exactly what S2000 said:

  1. Maximum utility occurs when MRS = Px / Py, not otherwise (remember the formula forever) so C is incorrect.

  2. The slope of the constraint line is Px / Py which is equal to the MRS when the indifference curve is tangent to the constraint line in order to maximize the utility. So B is correct, not A because it says “along” which is false, not along the curve, only in one in point in the curve utility is maximized.

#6

Forgot to say that MRS is negative so MRS = - (Px /Py) because there is a trade-off between consuming X and Y. This means that in order to consume more units of X, I need to consume lesser units of Y.

This applies to the constraint line (negative slope) and the indifference curve (convex curve).