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econ 302 ass 5 - Christine Drews Econ 302 Toossi Section 2...

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Christine Drews Econ 302 – Toossi Section 2 Question set 5 5/6/2009 Questions for Review 3. False. First of all, not all indifference curves have a diminishing MRS. Only those indifference curves that are convex have a diminishing MRS; those that are weakly convex, and thus have a linear indifference curve, the MRS remains constant. For those curves that do have a diminishing MRS, though, it is because of the downward slope of the curve that the MRS decreases, and not the other way around. The curves are downward sloping because of the more-is-better assumption, and not because of the MRS. 4. Here is an example of preference ordering that violates the transitivity property: Diet Pepsi > Diet Coke Coke > Diet Pepsi Diet Coke > Coke This is a violation because Coke would have to be preferred to Diet Coke because it is preferred to Diet Pepsi, which is preferred to Diet Coke. 6. It very frequently occurs that a consumer buys one good even though he prefers another. The reason for this trend is the consumer’s budget. Logically speaking, the consumer always purchases a bundle that is less preferred to another bundle by way of the more-is-better assumption, but consumers are constrained by their budget. It is not feasible for a consumer to spend more than their budget allows, so they are forced to settle on the best bundle within their budget, though it is not always the best bundle there is. 8. False. Indifference curves that are not strongly convex are characteristics of goods that are easily substituted for one another. Corner solutions are most likely to occur for such goods, and are indeed are almost certain to occur for goods that are perfect substitutes. For such goods, the MRS does not diminish at all, but, rather, is the same everywhere. In this case, the indifference curves are straight lines, instead of being convex at all. Moderation in behavior suggests that with indifference curves that are convex to the origin, the optimal bundle always occurs at “middle points” that show a mixture of the goods.
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