aps1x313_f08 - 2 and when A=10 the MRS will be 1. e) Since...

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1) So, from the problem’s information, the equation for the indifference curve through the bundle (A=20, B=5) is B = 100/A. And the equation for the indifference curve through bundle (A=10, B=15) is B = 150/A. a) The indifference curve that passes through the bundle (20, 5) is IC 0. The indifference curve passing through the bundle (10, 15) is IC 1. b) See graph below for the indicated areas. They are not shaded very well. But all the bundles on and above IC 1 are weakly preferred to the bundle (10, 15) and the bundle (20, 5) is weakly preferred to all the bundles on IC 0 and below it. c) By examination of the indifference curves: i) (30, 5) “I” (10, 15) TRUE ii) (10, 15) “P” (20, 5) TRUE iii) (20, 5) “R” (10, 10) TRUE iv) (24, 4) “R” (11, 9.1) FALSE v) (11, 14) “P” (2, 49) TRUE d) Charlie’s marginal rate of substitution at the bundle (10, 10) = 1. We get this by taking the absolute value of the derivative of IC 0 and evaluating this at (10, 10). Since B=100/A, then (dB/dA)=-100/A
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Unformatted text preview: 2 and when A=10 the MRS will be 1. e) Since (5, 20) lies on IC 0 Charlies marginal rate of substitution at the bundle (5, 20) is 100/5 2 = 4. f) Again on IC 0, Charlies marginal rate of substitution at the bundle (20, 5) is 100/20 2 = .25. g) Do Charlies preferences display diminishing marginal rates of substitution? Yes they do. Examining the graph you know that the MRS is getting smaller as we move down and to the right. 2 4 6 8 10 12 14 16 10 20 30 40 50 60 70 80 90 A B IC 0 IC 1 bundles weakly preferred to (10,15) (20, 5) is w eakly preferred to these bundles 2) The preferences that generate a utility function that gives rise to an indifference curve map with concentric circles is not well behaved as the monotonicity assumption is violated. 3) MU R = 2 W 3 R + 1/2R-1/2 And the MRS = [2 W 3 R + 1/2R-1/2 ]/ [3 W 2 R 2 + 1/2W-1/2 ] Econ 3130.1 Wissink Fall 2008 PS#1 XtraQ - ANSWERS...
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