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MRS must be higher than price ratio
#4-3-the-investment-opportunity-set #cfa #cfa-level-1 #economics #has-images #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-5-consumer-equilibrium #study-session-4
An affordable bundle represented by point b.
Consumer is able to purchase it because it lies on her budget constraint.
However, the MRSBW at that point is greater than the price ratio.
This means he is willing to give up wine to obtain bread at a rate greater than she must.
She will be better off moving downward along the budget constraint until she reaches the tangent point at a.
In effect, she is willing to pay a higher price than she must for each additional unit of bread until she reaches Ba.
For all of the units up to Ba, the consumer is receiving consumer surplus,
She would not purchase slices of bread beyond Ba at these prices because at a point like c, the marginal rate of substitution is less than the price ratio—meaning that the price for that additional unit is above her willingness to pay.
Even though she could afford bundle c, it would not be the best use of her income.
Consumer is able to purchase it because it lies on her budget constraint.
However, the MRSBW at that point is greater than the price ratio.
This means he is willing to give up wine to obtain bread at a rate greater than she must.
She will be better off moving downward along the budget constraint until she reaches the tangent point at a.
In effect, she is willing to pay a higher price than she must for each additional unit of bread until she reaches Ba.
For all of the units up to Ba, the consumer is receiving consumer surplus,
She would not purchase slices of bread beyond Ba at these prices because at a point like c, the marginal rate of substitution is less than the price ratio—meaning that the price for that additional unit is above her willingness to pay.
Even though she could afford bundle c, it would not be the best use of her income.
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