Using the diagram above answer whether each of the following

Using the diagram above answer whether each of the following are True/False and clearly explain how you reached your answer.

a. Apples are a normal good.

b. At Point C bananas violates the “Law of Demand.”

c. At Point A the Marginal Rate of Substitution (MRS) equals 3

Solution

a) True, because with the falling the price of banana there is an increase in the purchasing power i.e. increase in income so the consumption of apple increase with increase in income so is a normal good.

b) True because at C the price is higher still consumption is higher then at point A where price is lower and demand is lower. Contrary to this lae of demand states that quantity demanded increase as price decreases.

C) False, because at point A MRS = Slope of budget line . Slope of budget line is 20/10= 2