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ARE100AW09HW2

# ARE100AW09HW2 - 1 University of California Davis Department...

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University of California, Davis Department of Agricultural and Resource Economics Instructor: Monticha Sompolvorachai ARE 100A Winter 2009 Homework 2: Due Friday, January 23, 2009 Problem 1 : (a) True, false, explain briefly . If you know the slope of the budget constraint for two goods, then you know the absolute price of each good. (b) True, false, explain briefly . The downward slope of indifference curves is a consequence of diminishing MRS XY . (c) True, false, explain briefly . If the indifference curves are concave to the origin, then the optimal consumption bundle occurs at a corner solution. (d) Explain why a consumer will often buy one bundle of goods even though he prefers another. Problem 2 : For each of the scenarios below, you are to: Draw the indifference curves for the following individuals’ preferences for two goods; hamburgers (placed on the Y-axis) and beer (X-axis). State whether the slope is positive or negative, and why. Describe the characteristic of the MRS XY . (a) Al likes beer, but hates hamburgers. He always prefers more beer no matter how many hamburgers he has. (b) Betty is indifferent between bundles of either three beers or two hamburgers. Her preferences do not change as she consumes any more of either good. (c) Chris eats one hamburger and washes it down with one beer. He will not consume an additional unit of one item without another. (d) Debra loves beer but considers beef as a neutral (that is, its consumption neither makes her better off nor worse off.) Problem 3 : In 1990, the absolute price of coffee was \$10 per pound and the absolute price of a Toyota Corolla was \$10,000. In 1991, the absolute price of coffee rose to \$15 per pound and the absolute price of a Toyota Corolla rose to \$12,000. Did the relative price of coffee in terms of Corollas increase or decrease? What about the relative price of Corollas in terms of coffee? (Briefly explain each answer.) Problem 4 :

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