Answer+Key+to+HW2

Answer+Key+to+HW2 - Answer Key Problem Set #2 February 18,...

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Answer Key Problem Set #2 February 18, 2010 1. Consumers in both cities will equate their respective marginal rates of substitution with the relative price in their local market. In Boston 2 1 = MU A MU T and in San Diego 1 2 = MU A MU T . In Boston, a consumer is willing to give up two tangerines for an additional avocado. Note that this does not require that consumers in Boston have the same tastes as the consumers in San Diego, only that both have well behaved preferences. 2. In general, if both goods are normal goods, Laura would buy relatively more of the now relatively cheaper good (gym shoes) and less of the now rela- tively more expensive good (sneakers). However, there are several exceptions to this, including when her utility function is one of perfect substitutes or of perfect complements. Perfect Substitutes Utility Function Sneakers Gym Shoes Budget 1 Budget 2 Utility 1 Utility 2 1
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3. Assuming that the price of natural diamonds is greater than that for man- ufactured diamonds, rational consumers will choose to buy only manufactured diamonds. The demand curve below shows that the demand for manufactured diamonds is dependent on the relative price of natural and manufactured dia- monds. When their prices are equal, consumers are indi/erent between either diamond type. P(Nat)<P(M)
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Answer+Key+to+HW2 - Answer Key Problem Set #2 February 18,...

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