Tutorial+5+Solutions - statement IT’S THE BASIS OF THE...

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Eco1010f Tut assignment 5 Due date: week beginning 15 th March 2010 Answer the following questions (for submission at this week’s tut.) 1) You know that a consumer who can buy only two products, A and B, maximises her total utility when MU A /P A = MU B /P B . a) Which of the four variables, MU A , MU B , P A and P B , are not determined by the consumer? Which ones are? How does the consumer determine these? THE PRICES AREN’T DETERMINED BY THE CONSUMER. THE MARGINAL UTILITIES ARE. .. CONSUME MORE AND YOUR MU FALLS. b) Let’s assume that the consumer finds herself in a disequilibrium position such that MU X /P X > MU Y /P Y . Explain how the consumer returns to equilibrium. CONSUME MORE OF GOOD X (AND IN A 2 PRODUCT WORLD PERHAPS CONSUME LESS OF Y) TILL EQUALITY IS REACHED. 2) “The law of diminishing marginal utility explains why demand curves slope downwards to the right”. Explain why this statement is true. What aspect of the slope of a demand curve is not captured by this
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Unformatted text preview: statement? IT’S THE BASIS OF THE SUBSTITUTION EFFECT. YOU CAN EXPLAIN IT VIA THE EQUIMARGINAL PRINCIPLE (THE INEQUALITY IN QUESTION 1B). .. P X DROPS SO CONSUME MORE OF X TILL EQUALITY IS REACHED. 3) Using an indifference map, show how a demand curve can be derived. The diagram is in Lipsey All other goods PX Good X P1 P2 DD X Q X For further discussion: Indifference curves One of the features of an indifference map is that two indifference curves cannot cross each other. Explain why. [Hint: start off with two indifference curves that do cross each other, and show that the outcome is logically perverse.] a b c All about consistency(transitivity) – if a preferred to b and b preferred to c, then a must be preferred to c But this can’t happen if they are on the same indifference curve....
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Tutorial+5+Solutions - statement IT’S THE BASIS OF THE...

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