4. (30 points) Say whether the following is true or false. Explain it briefly (F

Question

4. (30 points) Say whether the following is true or false. Explain it briefly (For a true statement, an explanation is not necessary. For a false statement, explain why it is false. No ex credits!) (a) (10 points) My income (m) is $10, and P,-$1, P,-$2, and there is a subsidy of $10, if I buy at least 2 units of xi. Then, a bundle (x/,.x2)(2,10) is an affordable bundle to me. (b) (10 points) When your preference satisfies monotonicity, you cannot have a horizontal indifference curve. (c) (10 points) For perfect substitutes, marginal rates of substitution (MRS) is always zero.

Explanation / Answer

a) Given that income is $10. The bundle (2, 10) costs 2*1 + 10*2 = $22 without subsidy. Now if a subsidy of $10 is given for 2 units of x1, the new income is $20. Still  bundle (2, 10) costs $22 which is unafforadable with an increased income of $20. Hence the statement is False.

b) A horizontal indifference curve signifies no change in the consumption of one good for any given change in the consumption of the other while Monotonicity suggests more is preffered to less. To have more of one good, you need to make a sacrifice in the consumption of the other. Here this pricincple is not applicable so the statement is True.

c) For perfect substitutes, MRS is constant and can acquire any value which is a fraction but never zero. This is because the rate of substitution is fixed in case of perfect substitutes and so the indifference curve is composed of a a downward sloping line with a constant slope.

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