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Key to Problem Set #2
4.8 Suppose bundles A and B lie on the same indifference curve.
Bundle C lies between
bundles A and B, on a straight line that connects them.
The consumer’s preferences
satisfy the Declining MRS Principle.
Does the consumer prefer C to A and B, or does he
prefer A and B to C?
If the consumer’s preferences satisfy the
condition of declining
MRS
, then the
indifference curves are bowedinward. If
this is the case, then bundle
C
is
preferred to bundles
A
and
B
because
C
lies on an indifference curve above the
indifference curve on which bundles
A
and
B
lie. Bundle
C
will provide a more
equal mix of the two goods than
A
and
B
, regardless of where they lie.
The drawing to the right shows this
situation.
4.17 Esteban likes both chocolate ice
cream and lemon sorbet.
His preferences correspond to the utility function U(C,S) =
C
1/3
S
2/3
, where C stands for ounces of chocolate ice cream and S stands for ounces of
lemon sorbet.
Write a formula for Esteban’s family of indifference curves.
Plot some of
those curves on a graph.
Would Esteban rather have four ounces of chocolate ice cream
and two ounces of lemon sorbet or two ounces of chocolate ice cream and four ounces of
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This note was uploaded on 06/09/2008 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.
 Spring '07
 Eastin
 Business

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