Question

In the diagram, suppose the consumer is currently exhausting his or her income at a point where the marginal rate of substitution of apples for oranges is greater than 5/4. That is, MUA/MU0>5/4. To maximize utility, the consumer should move from point (and explain why)

a to e

b to e

c to e

d to e

Answer 1

To maximize utility, the consumer should transition from point C to point E. The Option C is correct.

Utility maximization means to make choices or decisions that result in the highest level of satisfaction or well-being based on personal preferences and constraints.

Currently, the consumer finds themselves at a point where MRS > 5/4, indicating their preference for point E on the utility curve.

However, since the consumer's current income is limited, their consumption point must align with the budget line. Therefore, the consumer currently resides at point C on the utility curve
`T_0`.

Given the opportunity to shift to point E with higher utility, which also falls on the budget line, it is advisable for the consumer to make this move. In conclusion, to maximize utility, the consumer should transition from point C to point E.

Note: The graph is attached below.