chap_03answers - PART II PRODUCERS, CONSUMERS, AND...

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PART II PRODUCERS, CONSUMERS, AND COMPETITIVE MARKETS CHAPTER 3 CONSUMER BEHAVIOR REVIEW QUESTIONS 1. What does  transitivity of preferences  mean? Transitivity of preferences implies that if someone prefers  A  to  B  and prefers  B  to  C , then he or  she prefers  A  to  C . 2. Suppose that a set of indifference curves was not negatively sloped. What could you say about the  desirability of the two goods? One major assumption of preference theory is that more is preferred to less. Thus, we can expect  that consumers will experience a lower level of satisfaction if we take some of a good away from  them. From this, we necessarily derive negatively sloped indifference curves. However, if one good  is undesirable, then less of the undesirable good leaves the consumer better off, e.g., less toxic  waste is preferred to more toxic waste. When one good is undesirable, the indifference curves  showing the trade-off between that good and a desired good have positive slopes. In Figure 3.2  below, the indifference curve  U 2  is preferred to the indifference curve  U 1 . Figure 3.2 3. Explain why two indifference curves cannot intersect. The explanation is most easily achieved with the aid of a graph such as Figure 3.3, which shows 
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two indifference curves intersecting at point  A.  We know from the definition of an indifference  curve that a consumer has the same level of utility along any given curve. In this case, the  consumer is indifferent between bundles  A  and  B  because they both lie on indifference curve  U 1 Similarly,   the   consumer   is   indifferent   between   bundles   A   and   C   because   they   both   lie   on  indifference curve  U 2 . By the transitivity of preferences this consumer should also be indifferent  between  C  and  B . However, we see from the graph that  C  lies above  B,  so  C  must be preferred to  B . Thus, the fact that indifference curves cannot intersect is proven. Figure 3.3 4. Draw a set of indifference curves for which the marginal rate of substitution is constant. Draw two  budget lines with different slopes; show what the satisfaction-maximizing choice will be in each case.  What conclusions can you draw? In Figure 3.4, Good  X  and Good  Y  are perfect substitutes and, thus, the indifference curves are  straight lines,   U 1   and   U 2 , each with a slope of -1. For goods that are perfect substitutes, the  consumer will always prefer to purchase the cheaper of the two goods to obtain maximum utility.  For example, if Good  Y  is cheaper than Good  X , the consumer would face the budget constraint  L
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This note was uploaded on 06/13/2010 for the course ECONOMICS 2008013000 taught by Professor Mercy during the Spring '10 term at Universitas Katolik Indonesia Atma Jaya.

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chap_03answers - PART II PRODUCERS, CONSUMERS, AND...

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