problem - 1. a. Indifference Curve b. Marginal rate of...

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Unformatted text preview: 1. a. Indifference Curve b. Marginal rate of substitution is the negative of the slope of the indifference curve. Diminishing marginal rates of substitution mean that as more of one good is substituted, its value in terms of the other good declines. This diminishing MRS is based on the assumption that consumers make consumption decisions based on their intent to maximize their utility. The MRS diminishes as we move down along an indifference curve. When there is a diminishing MRS, indifference curves are convex. U(F,G) =FG can be one of examples. As more of food is substitute, the value of gas declines. c. U(F,G) =FG ¡ = $1, ¢ = $3 max(F,G) 50 100 150 200 250 20 40 60 80 100 120 F G U(F,G)=FG 20 200 4000 40 100 4000 60 66.66667 4000 80 50 4000 100 40 4000 F+3G=1000 Using MRS= ¡ ¢ ¡ £ MRS = ¤¥ ¢ ¤¥ £ = ¡ ¢ ¡ £ = ¦ § 3G=F F+3G=1000 F=500, G=166.67 d. ¨ © =1 ¨ ª ==4 F+4G=1000 MRS= ¤¥ ¢ ¤¥ £ = ¡ ¢ ¡ £ = ¦ « 8G=1000 F=500 G=125 As increasing price of gasoline, consumption of food stays same. So they are As increasing price of gasoline, consumption of food stays same....
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This note was uploaded on 01/18/2011 for the course FIN fin580 taught by Professor Miller during the Spring '10 term at University of Illinois, Urbana Champaign.

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problem - 1. a. Indifference Curve b. Marginal rate of...

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