Long Assignment 2 Answer Key

Long Assignment 2 Answer Key - ECON 256: Intermediate...

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ECON 256: Intermediate Microeconomics Long Assignment: 2 1 Answer Key Due Date: Thursday, October 14, 2010 1. (Chapter 3 Review Question 3; p. 77) True or False? Explain. The downward slope of indifference curves is a consequence of the diminishing marginal rate of substitution. False. Diminishing MRS explains the convexity of the indifference curve, but not the downward slope. Downward slope reflects the trade-off in consumption. 2. (Chapter 3 Problem 3; p. 77) Smith likes Cashews better than almonds and likes almonds better than walnuts. He likes pecans equally well as macadamia nuts and prefers macadamia nuts to almonds. Assuming his preferences are transitive, which does he prefer? (a) Pecans or walnuts? Pecans are equally preferred to macadamias, which are preferred to almonds, which are preferred to walnuts, so by transitivity it follows that pecans are preferred to walnuts. (a) Macadamia nuts or cashews? Macadamias are preferred to almonds and cashews are preferred to almonds. Transitivity tells us nothing here about the preference ranking of macadamias and cashews. 3. Draw indifference curves that represent the following individuals’ preferences for hamburgers and soft drinks. Indicate the direction in which the individuals’ satisfaction (or utility) is increasing. Label your graphs clearly. Place soft drinks on the horizontal axis and hamburgers on the vertical axis. (a) Bob loves hamburgers and dislikes soft drinks. If he is served a soft drink, he will drink it just to be polite. Since Bob will drink the soft drink in order to be polite, it can be thought of as a “bad”. When served another soft drink, he will require more hamburgers at the same time in order to keep his satisfaction constant. More soft drinks without more hamburgers will worsen his satisfaction. More hamburgers and fewer soft drinks will increase his utility, so his satisfaction increases as we move upward and to the left.
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ECON 256: Intermediate Microeconomics Long Assignment: 2 2 (b) Molly loves hamburgers and soft drinks, but insists on consuming exactly one soft drink for every two hamburgers that she eats. Molly wants to consume the two goods in a fixed proportion so her indifference curves are L-shaped. For a fixed amount of one good, she gets no extra satisfaction from having more of the other good. She will only increase her satisfaction if she has more of both goods.
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This note was uploaded on 03/27/2011 for the course ECON 256 taught by Professor ?? during the Fall '05 term at Bucknell.

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Long Assignment 2 Answer Key - ECON 256: Intermediate...

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