3-Discussion Questions

3-Discussion Questions - Lecture 3 Consumer Theory(I...

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Lecture 3: Consumer Theory (I) Suggested questions and exercises (Pindyck and Rubinfeld Ch.3). Questions: 4, 6, 9, 10, 11 Exercises: 5, 10, 14, 15, 16 QUESTIONS 4. Jon is always willing to trade one can of coke for one can of sprite, or one can of sprite for one can of coke. a. What can you say about Jon’s marginal rate of substitution? b. Draw a set of indifference curves for Jon. c. Draw two budget lines with different slopes and illustrate John's Optimal Choice. What conclusion can you draw? 6. Explain why an MRS between two goods must equal the ratio of the price of the goods if that bundle is the consumer's optimal choice. 9. Upon merging with the West German economy, East German consumers indicated a preference for Mercedes-Benz automobiles over Volkswagens. However, when they converted their savings into deutsche marks, they flocked to Volkswagen dealerships. How can you explain this apparent paradox? 10. Draw a budget line and then draw an indifference curve to illustrate the consumer's optimal choice with two products. Use your graph to answer the following questions. a. Suppose that one of the products is rationed. Explain why the consumer is never made better off.
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