Given the the utility function UFC FC and this budget const

Given the the utility function U(F,C) = (FC), and this budget constraint: 100,000 = 4F+40C,

Suppose that a person is consuming more F and less C than the utility maximizing bundle. Would the marginal rate of substitution of F for C be greater or less than the MRS at the maximized utility? Explain.

Solution

The marginal rate of substitution of F for c will be greater or same level than the MRS at the maximizes uitility.

The marginal rate of substitution is the rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility

This important result tells us that utility is maximized when the consumer\'s budget is allocated so that the marginal utility per unit of money spent is equal for each good. If this equality did not hold, the consumer could increase his/her utility by cutting spending on the good with lower marginal utility per unit of money and increase spending on the other good. To decrease the marginal rate of substitution, the consumer must buy more of the good for which he/she wishes the marginal utility to fall for (due to the law of diminishing marginal utility).nother good while maintaining the same level of utility.