Solutions_to_Problem_Set_3 - therefore we should have MRS P...

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Solutions to Problem Set 2 All problems are from Chapter 4 of the textbook. 34. In this case, the commodities are perfect substitutes above the threshold level, resulting in linear rather than convex indifferenc e curves. The “more is better assumption” is violated below the threshold level. For example, an increase in X from 1 to 2 provides no additional utility unless Y is greater than 3. See the following figure. 38. a. 50 S 50 T 500 S T 10 b. MRS MU S / MU T 2 T /2 S T / S . c. At the optimal the budget constraint and the indifference curve should be tangent,
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Unformatted text preview: therefore we should have MRS P S / P T T / S 50/50 1 T * S * . The optimal must also be affordable, thus S * T * 10. Substitution gives us S * T * 5. Problem 41 is not graded. 41. U ( B , Z ) B AB Z Z MU Z 1 AB Z 1 MRS MU B / MU Z [(1 AB 1 Z )/(1 AB Z 1 )]...
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