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micro-ex3 - Ani Guerdjikova Department of Economics Cornell...

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Ani Guerdjikova Fall 2006 Department of Economics Intermediate Microeconomics Cornell University ECON 313 Problem Set 3 Problem 11 (Indifference curves, utility function, MRS) Antony consumes only nuts and berries. We denote by ( x 1 ; x 2 ) the consumption bundle which contains x 1 nuts and x 2 berries. Antony’s preferences can are described by the utility function: U ( x 1 ; x 2 ) = x 1 x 2 a) Explain the term indifference curve. Determine the indifference curves which pass through the points (16; 1) and (4; 9) . Draw them in a diagram. b) Antony’s initial endowment is (16; 1) . Would he exchange his initial endowment for the con- sumption bundle (4; 9) ? Indicate in your graph those consumption bundles, which Antony prefers to his initial endowment. c) For any consumption bundle, determine the marginal rate of substitution ( MRS ) for Antony. Explain the meaning of the marginal rate of substitution and check whether Antony’s preferences have a falling or an increasing MRS .
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