Author Question: If MRS > MRT, then the consumer is better off than at equilibrium. Indicate whether the ... (Read 147 times)

Wadzanai · **on:** Jul 1, 2018

If MRS > MRT, then the consumer is better off than at equilibrium.

Indicate whether the statement is true or false

Question 2

Consumers do not prefer gifts-in-kind to cash gifts.

Indicate whether the statement is true or false

flannelavenger · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

False. MRS > MRT implies that the consumer values the next unit of x more than it costs to obtain it. That is, there is a gain from trade to be made. As more x is purchased, MRS falls and eventually MRS = MRT. At this point, all gains from trade have been made.

Answer to Question 2

True . It is possible the consumer would buy the same gift with cash and therefore be just as well off. If the consumer bought something other than the gift, that means that this something else is preferred to the gift. At best, the gift yields the same utility as would have been achieved with the cash, but never more.