3.1 Q&A

What are the four basic assumptions about individual preferences?Explain the significance or meaning of each. (1) Preference are [...], which means that consumers are able to rank all possible baskets. (2) Preferences are [...], which means that if bundle A is preferred to bundle B, and bundle B is preferred to bundle C, then [...] (3) More is [...] preferred to less because [...] (4a) The marginal rate of substitution is constant, where indifference curves are straight lines (4b) The marginal rate of substitution is constant, where indifference curves are convex

(1) Complete (2) Transitive / A preferred to C (3) always / all goods are desirable (4a) True (4b) False

What happens to the marginal rate of substitution as you move down along a convex indifference curve? (1) Along a convex indifference curve, the marginal rate of substitution [...] What happens to the marginal rate of substitution as you move down along a linear indifference curve? (2) Along a linear indifference curve, the marginal rate of substitution [...]

(1) decreases (2) is constant

Describe the indifference curves associated with two goods that are perfect substitutes. (1) The indifference curves for two goods that are perfect substitutes.... Describe the indifference curves associated with two goods that are perfect complements (2) The indifference curves for two goods that are perfect complements...

1) Are downward-sloping straight lines 2) Are shaped as right angles

In this chapter, consumer preferences for various commodities did not change during the analysis. In some situations, however, preferences do change as consumption occurs. Discuss why and how preferences might change over time with the consumption of cigarettes. (1)the consumption of cigarettes could change of Discuss why and how preferences might change over time with the consumption of dinner at a restaurant with a special cuisine. (2) The consumption of dinner for the first time at a restaurant with a special cuisine could change preferences if

1) Cigarette consumption is habit forming / addictive (2) a new dining experience creates enthusiasm to seek out more exciting and different cuisines.

Jon is always willing to trade one can of coke for one can od sprite, or one can of sprite for one can of coke. What can you say about Jon's marginal rate of substitutes? (1) Jon's marginal rate of substitute is equal to [] (2) Using the line drawing tool, - Graph an indifference curve representing Jon's preference. Label it U-1 - Graph another indifference curve representing higher level of utility. U-2 Graph another indifference curve representing even higher level of utility. U-3

1) Equal to 1 2) Graph:

Jon is always willing to trade one can of coke for one can od sprite, or one can of sprite for one can of coke. What can you say about Jon's marginal rate of substitutes? (1) Jon's marginal rate of substitute is equal to [] (2) The figure to the right includes two budget lines with different slopes: L-1 and L-2. What conclusion can you draw about Jon's satisfaction maximizing choices?

1) Equal to 1 2) If the ration of the price of Sprite and Coke is greater than one, then Jon will only consume coke

Can a set of indifference curves be upwards sloping? If so, what would this tell about the two goods?

Cannot be upwards sloping because this *violates the assumption that more is better than less* indicating that one the goods is a "bad"

How does the chosen good depends on the budget line and indifference curve?

If the budget line is steeper than the indifference curve, the good from the vertical axis is chosen. If the budget line is flatter than the difference curve, then the good on the horizontal axis is chosen.

If Jane is currently willing to trade 3 soft pretzels for 1 chilly dog, then she must like chili dogs better than soft pretzels. The statement is...

Not necessarily true if Jane's willingness to trade soft pretzels for 1 chili dog depends on how many chili dogs and soft pretzels she currently has.

Explain why a marginal rate of substitution between two goods must be equal the ratio of prices of the goods the consumer to achieve maximum satisfaction. A consumer achieves maximum satisfaction, when the MRS is equal to the ratio because...

Otherwise the consumer could trade one good for another at market prices to obtain a higher level of satisfaction.

B & E (1) Graph (2) Do you think Bartolo and Emilio have the same preferen

Product Function, all points have the same product! B) U-B1 & U-E1 F*C = 50 1) 10*5=50 2) 4*12.5=50 3) 5*10=50 E) U-B2 & U-E2 F * C = 1) 15*8=120 2) 12*10=120 3) 10*12=120 (2) The same preferences because they will rank all bundles in the same order.

Joe has convex indifference curves and dislikes both, hamburgers and soft drinks. Use the three point curved line drawing tool, (1) graph an indifference curve consistent with Joe's preferences. U-1 (2) graph an indifference curve for Joe showing a higher level of utility.

Since Joe both goods: his set of indifference curves be bowed outward instead of inward as in the normal case where more is preferred to less.

Explain why two different curves cannot intersect. If two indifferent curves intersect, then

both transitivity and the more is better than less assumption are violated.