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Unformatted text preview: Department of Economics University of California, Berkeley ECON 100A Microeconomic Analysis Fall 2009 Problem Set 2 Due: Tuesday, September 29, 2009, 11:00 AM (in lecture) True or False and explain For each statement below, decide whether it is true or false, and explain the reasoning behind your answers in a few sentences. When appropriate, provide a diagram. (a) The following diagram shows choices by a consumer choosing between x and y , which are both desirable. When the budget line is L 1 , the consumer selects basket A , and when the budget line is L 2 , she selects basket B . Based on revealed preference, we can conclude that A is strongly preferred to C . (b) Suppose there are two economies, say A and B . In both economies the cost of living is computed using a Laspeyres Index. However, the preferences of the inhabitants of both countries are different: in economy A the degree of substitutability among goods is relatively higher than in economy B . As a result, we should expect that the measured....
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