exercise 2

Exercise 2. Consider a consumer's Utility Maximization Problem where U is the utility function W is the consumer's budget and p is the price vector. a) What is an interior solution? What relationship must hold between the MRS and the relative price of two goods at an interior solution? How do you interpret this condition? b) What is a corner condition? What relationship must hold between the MR8 and the relative price of two goods at a corner solution? How do you interpret this condition? c) For a consumer with strictly monotonic and strictly convex preferences, draw an indifference curve diagram illustrating an interior solution and a corner solution. d) Then suggest a Utility function where the consumer's optimal choice could be at an interior solution for certain values of the parameters p and W and at corner solution for other values of the same parameters