Question

Given below are two statements:
Statement (I): The expression $\Delta X_1 / \Delta X_2$ is termed as the marginal rate of substitution (MRS) of $X_1$ for $X_2$.
Statement (II): If $\Delta Y_1 / \Delta Y_2 < P_{Y2}/P_{Y1}$, more of $Y_2$ should be produced at the expense of $Y_1$.}
In light of the above statements, choose the most appropriate answer from the options given below:

• A. Both Statement (I) and Statement (II) are true.
• B. Both Statement (I) and Statement (II) are false.
• C. Statement (I) is true but Statement (II) is false.
• D. Statement (I) is false but Statement (II) is true.

Hint:

To remember the optimal product combination rule: if the substitution rate of $Y_1$ for $Y_2$ is less than their price ratio ($\Delta Y_1/\Delta Y_2 < P_{Y2}/P_{Y1}$), always shift production towards $Y_2$ to increase total revenue.

Answer 1

The Correct Option is D