HW5S_302 - Econ 302- Solution to Fifth Problem Set Spring...

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Spring 2010-Ali Toossi Due: Wednesday, March 3 Answer to question3. False. Diminishing MRS explains the convexity of the indifference curve, but not the downward slope. The downward slope of the indifference curves is a result of assumption of more is better. Answer to question5. The slope of an indifference curve indicates how much of a good one is willing to give up to get one unit of another and be at the same level of satisfaction. Thus the more of one good that one is willing to give up, the less important is that good relative to the other. Answer to question8. True. The corner solution (a) is on a higher indifference curve than the corresponding tangency (b). Which corner becomes the solution depends on the slope of the budget constraint. There can be a solution in either corner, as shown in the graphs below. The Quantity discounts might change this outcome and you get an interior solution. Y a Y B b a X X Answer to problem 9. Picabo's budget constraint is B = 15 - 2S. Initially, she needs the same number of pairs of skis and bindings S = B. Inserting this consumption equation into her budget constraint yields B = 15 - 2B, or 3B = 15, which solves for B = 5 pairs of bindings (and thus S = 5 pairs of skis). As an aggressive skier, she needs twice as many skis as bindings S = 2B. Inserting this consumption equation into her budget constraint yields B = 15 - 4B, or 5B = 15, which solves for B = 3 pairs of bindings (and thus S = 6 pairs of skis). She consumes more skis and fewer bindings as an aggressive skier than as a recreational skier. See graph below.
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This note was uploaded on 08/02/2010 for the course ECON ECON 302 taught by Professor Arvan-rad during the Spring '09 term at University of Illinois at Urbana–Champaign.

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HW5S_302 - Econ 302- Solution to Fifth Problem Set Spring...

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