Price Theory HW2 answers

Price Theory HW2 answers - Skelton Eco 3301 Homework 2...

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Skelton Eco 3301 Homework 2 Answers 1. After the changes, you can still afford your original basket, so you must be better off after the changes. 2. No, he should not make the trade because the ratio of prices (for basketball tickets over movie tickets) is 5:1, while his MRS is 4:1. So, the basketball game will give him four times the utility but at five times the cost, so this would be a bad deal. 3. A) The indifference curves are U1, U2 and U3, while the budget line is the dark line. Since they’re both substitutes and margarine is cheaper, he’ll choose to buy only margarine. B) The indifference curves are not convex because convex implies that they are bowed inward whereas these indifference curves are straight lines. Furthermore, convex indifference curves imply that the marginal rate of substitution changes over the indifference curves (remember the diminishing marginal rate of substitution) whereas, with perfect substitutes, the marginal rate of substitution is always 1:1.
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This note was uploaded on 10/02/2008 for the course ECON 3301 taught by Professor Skelton during the Spring '08 term at SMU.

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Price Theory HW2 answers - Skelton Eco 3301 Homework 2...

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