# answers-3 - Answers to Questions for Review 1. You will be...

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Answers to Questions for Review 1. You will be as well off as a year ago; your budget line will remain the same. 2. False. The slope of the budget constraint tells us only the ratio of the prices of the two goods. 3. False. Diminishing MRS explains the convexity of the indifference curve, but not the downward slope. 4. You prefer Coke to Diet Coke, Diet Coke to Diet Pepsi, but prefer Diet Pepsi to Coke. 5. The slope of an indifference curve indicates how much of a good one is willing to give up to get one unit of another and be at the same level of satisfaction. Thus the more of one good that one is willing to give up, the less important is that good relative to the other. 6. One bundle may be within the individual's opportunity set while the other is not. 7. If the relative price of the two goods is not the same as the slope of the indifference curve, then one will always get a corner solution. 8. True. The corner solution (a) is on a higher indifference curve than the corresponding tangency (b). Which corner becomes the solution depends on the slope of the budget constraint. There can be a solution in either corner, as shown in the graphs below. Quantity discounts will not change this outcome scenario. Y a Y B b a X X 9. Suppose that Ralph's current consumption bundle is given by the point A in the diagram. The information given tells us that on the budget with M+10 units of income, Ralph would consume at the point B, and that B is equally preferred to C. This can happen only if the indifference curve passing through B and C does not have the usual convex shape. His indifference curve through B and C could, for example, be a straight line, indicating that tuna fish and Marshallian money are perfect substitutes in this region. (If the indifference curve through B and C were convex, then Ralph's optimal bundle would lie between B and C, which means that he would spend some of the extra \$10 on tuna fish.)

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10. Y M + 10 M B A C Tuna Answers to Chapter 3 Problems 1. Y(\$/wk) 100 - 80 - 60 - 40 - 20 - | | | | | | Seeds (lbs/wk 20 40 60 80 90 100 2. . Y(\$/wk) 100 - 80 - 60 - 40 - 20 - | | | | | | Seeds (lbs/wk 20 40 60 80 90 100 3. a) Pecans are equally preferred to macadamias, which are preferred to almonds, which are preferred to walnuts, so by transitivity it follows that pecans are preferred to walnuts.
b) Macadamias are preferred to almonds and cashews are preferred to almonds. Transitivity tells us nothing here about the preference ranking of macadamias and cashews. 4. True (see diagram on next page). Each price increases by 15%, so that – Px/Py is unchanged. Y M/80 slope = 120/80 = 3/2 M/92 Slope = 138/92 =3/2 M/138 M/120 X 5. a) Y 150 60 Milk Balls 5. b) The opportunity cost of an additional unit of the composite good is 1/2.5 = 0.4 bags of milk balls. 6.

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