20. For indifference curves (most common ones, neither for perfect substitutes n
ID: 1140365 • Letter: 2
Question
20. For indifference curves (most common ones, neither for perfect substitutes nor for perfect complements), his or her MRS will diminish as x is substituted for y. ncrease as x is substituted for y be undefined except in special cases. a. c. d.always depend only on the ratio of x to y. 21. If utility is given by U(x, y)-min(x,3 y) then the bundle (3,2) provides the same utility as the bundle b. 2, 3) 22. Suppose an individual's MRS (of steak for beer) is 2:1. That is, at the current consumption choices he or she is willing to give up 2 beers to get an extra steak. Suppose also that the price of a steak is $1 and a beer is 25C. Then in order to increase utility the individual should a. b.buy more beer and less steak. buy more steak and less beer. continue with current consumption plans. none of the above. d.Explanation / Answer
Answer
20) The correct answer is (a) diminish as x is substitutes for y
In General Indifference Curves are conxex and downward sloping. Hence absolute value of MRS diminishes as x increases. You can also think like initially for 1 unit of X you are willing to pay more. But when you start consuming more X you are willing to pay lesser for additional X.
Hence The correct answer is (a) diminish as x is substitutes for y
21) The correct answer is (c) (4,1)
For Bundle (3,2), U(x,y) = min{3 , 3*2} = 3
We can easily see that for Bundle (4,1), U(x,y) = min{4 , 3*1} = 3
Hence The correct answer is (c) (4,1)
22) The correct answer is (a) Buy more steak and less Beer
Optimality condition
MRS = Px/Py
MRS = 2/1 = 2 and Px/Py = 4. Hence MRS should Increase In order to increase MRS we have to decrease x(i.e. Beer) and increase y(steak)
Hence The correct answer is (a) Buy more steak and less Beer
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