Chapter4 - Mgnt 6005 Homework Chptr 4 P4.4 Indifference...

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Mgnt 6005 Homework Chptr 4 P4.4 Indifference Curves. Suggest briefly whether each of the following statements about indifference curves that show preferences between goods and services is true or false and defend your answer. A. Consumers prefer higher indifference curves that represent greater combinations of goods and services to lower indifference curves that represent smaller combinations of goods and services. B. Indifference curves slope downward because if the quantity of one consumer product is reduced, the quantity of the other must also decrease to maintain the same degree of utility. C. The slope of an indifference curve shows the rate at which consumers are willing to tradeoff goods and services. D. The fact that indifference curves do not intersect stems from the A more is better @ principle. E. Indifference curves bend inward (are concave to the origin) because if goods are relatively abundant, the added value of another unit of goods will be small in relation to the added value of another unit of services. P4.4 SOLUTION A. True. Consumers prefer more to less, so they prefer higher indifference curves that represent greater combinations of goods and services to lower indifference curves that represent smaller combinations of goods and services. B. False. Indifference curves slope downward. This stems from the fact that the slope of an indifference curve shows the tradeoff involved between goods and services. Because consumers like both goods and services, if the quantity of one is reduced, the quantity of the other must increase to maintain the same degree of utility. . C. True. The slope of an indifference curve shows the rate at which consumers are willing to tradeoff goods and services. For example, when goods are relatively scarce, the law of diminishing marginal utility means that the added value of another unit of goods will be large in relation to the added value of another unit of services. Conversely, when goods are relatively abundant, the added value of another unit of goods will be small in relation to the added value of another unit of services.
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D. True. Indifference curves do not intersect. Holding goods constant, an indifference curve involving a greater amount of services must give greater satisfaction. Similarly, holding services constant, an indifference curve involving a greater amount of goods must give greater satisfaction. This stems from the fact that goods and services both provide consumer benefits, and reflects the A more is better @ principle. P4.6 Budget Allocation. Consider the following data: Goods (G) Services (S) Units Total Utility Units Total Utility 0 0 0 0 1 100 1 70 2 160 2 124 3 210 3 175 4 250 4 220 5 275 5 250 A. Construct a table showing the marginal utility derived from the consumption of goods and services. Also show the trend in marginal utility per dollar spent (the MU/P ratio) if P G = $20 and P S = $15. B.
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This note was uploaded on 11/13/2011 for the course MIS 4100 taught by Professor Maxnorth during the Spring '11 term at Birmingham-Southern College.

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Chapter4 - Mgnt 6005 Homework Chptr 4 P4.4 Indifference...

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