please refer to Economics–> study session 4–> reading 14–> practice problems No.5 why C is incorrect?
- They have good x and good y reversed: the maximum utility occurs when the marginal rate of substitution = price(x) / price(y).
- 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)).
Schweser or CFAI curriculum? 2015? lol. what I see is a problem about giffen goods…
I took it as the 2015 CFA Institute curriculum, v. 2, p. 92.
I got it.
Exactly what S2000 said:
Maximum utility occurs when MRS = Px / Py, not otherwise (remember the formula forever) so C is incorrect.
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.
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).