Key to Practice for Midterm 1

# Key to Practice for Midterm 1 - ECON 301 Solutions to...

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ECON – 301 Solutions to Practice for Midterm 1 1) The equation of the budget line for this consumer is 2000 = 5F + 1Y . As such, we know that the slope of the budget line, when the composite is measured on the vertical axis, is - 5 (the price ratio). At the optimum, the slope of the indifference curve must equal the slope of the budget line. Thus, the slope of the indifference curve must be such that the rate at which the consumer is willing to give up one good for the other is five to one. At the optimum, this rate equals the rate at which the market trades off these goods, reflected in the prices. 2) a., b. The following are graphs of the budget lines and baskets: We know that basket A is chosen when we have BL2 and that B is chosen when we have BL1. Hence, in case 1, A is chosen when B is affordable, implying that A is preferred to B. On the other hand, B is chosen when A is affordable, implying that B is preferred to A. This is inconsistent with utility maximization and constant preferences. In case 2, A

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## This note was uploaded on 05/11/2011 for the course ECON 301 taught by Professor Sheng during the Spring '11 term at ITT Tech Pittsburgh.

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Key to Practice for Midterm 1 - ECON 301 Solutions to...

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