1) Provide an economic rationale for consumers having diminishing marginal rates of substitution.
2) Suppose that Consumer $A$ has a consumption bundle $X_{A}=(5,4)$. Further suppose that Consumer B has a consumption bundle $X_{B}=(3,6)$. Consumer A's utility at his bundle is $U_{A}=25$. Consumer B's utility at her bundle is $U_{B}=30$. Who is better off in this situation and why?
3) Suppose a consumer who is trying to maximize her utility discovered the following condition was true for her current consumption bundle:
\[
\frac{M U_{1}}{p_{1}}< \frac{M U_{2}}{p_{2}}
\]
What should the consumer do to maximize her utility?
Answer
To maximize her utility, the consumer should reallocate her spending from good 1 to good 2 until the marginal utilities per dollar spent on both goods are equal.
Step 1 ：Consumers have diminishing marginal rates of substitution because of the concept of diminishing marginal utility. As they consume more of a good, the additional satisfaction they derive from consuming an additional unit of that good decreases, making them willing to give up less and less of another good to obtain more of the good they are consuming.
Step 2 ：Consumer B is better off in this situation because their utility is higher \(\boxed{30}\) compared to Consumer A's utility \(\boxed{25}\).
Step 3 ：To maximize her utility, the consumer should reallocate her spending from good 1 to good 2 until the marginal utilities per dollar spent on both goods are equal.
