10. Describe why a consumer who chooses a consumption bundle in which the relati

Question

10. Describe why a consumer who chooses a consumption bundle in which the relative price exceeds the marginal rate of substitution can't be at an optimum.

4. A hotel owner, having heard that new hotels plan to open in his area, saysl "We have too many hotels in this town already. Statistics show that vacancy rates average 20 percent on any given night." Assuming this is correct, evaluate his negative assess¬ment of the situation in terms of business-stealing and product-variety externalities.

Explanation / Answer

By saying they are not "at an optimum" you assume that the consumer values their own time of going and buying the items a' la carte less than the saving that would be made by this action. To clarify: You can buy three items bundled together at $45. Or you can buy the same three items separately for $40. Now if the consumer purchases the bundle we can assume they value the convenience of buying the bundle at more than $5, or else they would have taken the extra effort to go buy the items separately. Your teacher is assuming that (s)he knows the consumer's preferences for convenience, this is clearly a bad assumption.

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