Key to problem set _2

Key to problem set - 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

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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 bowed-inward. 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.

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Key to problem set - 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

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