Question

A consumer gets utility from commodities x1 and x2. When p1=2 and p2=5, the consumer spends all of her income on x2 and never buys any x1, no matter how large or small her income is. Based on this information, her friends have concluded that x1 is necessarily an economic bad for her. Are they correct? False True 2. A consumer's preferences are well-behaved and consistent with diminishing MRS. The consumer maximizes her utility subject to a budget constraint. You calculate her ordinary demand functions but after plugging in current prices and incomes, you solve for a negative consumption level for x1! Which of the following is a valid conclusion on your part: There are multiple "true" optimal consumption bundles. None of the answers is correct. The true optimum has the consumer consume none of x2. The consumer will sell good 1. The consumer will spend all her income on x2. The consumer will sell good 2.

          A consumer gets utility from commodities x1 and x2. When p1=2 and p2=5, the consumer spends all of her income on x2 and never buys any x1, no matter how large or small her income is. Based on this information, her friends have concluded that x1 is necessarily an economic bad for her. Are they correct?
False
True

2. A consumer's preferences are well-behaved and consistent with diminishing MRS. The consumer maximizes her utility subject to a budget constraint. You calculate her ordinary demand functions but after plugging in current prices and incomes, you solve for a negative consumption level for x1! Which of the following is a valid conclusion on your part:
There are multiple "true" optimal consumption bundles.
None of the answers is correct.
The true optimum has the consumer consume none of x2.
The consumer will sell good 1.
The consumer will spend all her income on x2.
The consumer will sell good 2.

Added by Greg J.

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