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problem set 2 - Econ351 Fall 2013 Problem Set#2 1 Basic...

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Econ351, Fall 2013 Problem Set #2 1 Basic Concepts Exercise 1 Can a set of indi/erence curves be upward sloping? If so, what would this tell you about the two goods? Explain why two indi/erence curves cannot intersect. Exercise 2 Explain why the marginal rate of substitution between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction. Exercise 3 Describe the equal marginal principle. Explain why this principle may not hold if increasing marginal utility is associated with the consumption of one or both goods. Exercise 4 Explain whether the following statements are true or false. (a). The marginal rate of substitution diminishes as an individual moves downward along the demand curve. (b). The level of utility increases as an individual moves downward along the demand curve. (c). Engel curves always slope upwards. (d). Suppose that an individual allocates his or her entire budget between two goods, food and clothing. It can°t be the case that both goods be inferior. Exercise 5 What does it mean for consumers to maximize expected utility? Can you think of a case in which a person might not maximize expected utility? Exercise 6 Why do people often want to insure fully against uncertain situations even when the premium paid exceeds the expected value of the loss being insured against? 2 Analytical Skills Exercise 7 Draw indi/erence curves that represent the following individual preferences for hamburgers and soft drinks. Indicate the direction in which the individuals°satisfaction (or utility) is increasing. (a). Joe has convex preferences and dislikes both hamburgers and soft drinks. (b). Jane loves hamburgers and dislikes soft drinks. If she is served a soft drink, she will pour it down the drain rather than drink it. (c). Bob loves hamburgers and dislikes soft drinks. If he is served a soft drink, he will drink it to be polite. (d). Molly loves hamburgers and soft drinks, but insists on consuming exactly one soft drink for every two hamburgers that she eats. (e). Bill likes hamburgers, but neither likes nor dislikes soft drinks. (f). Mary always gets twice as much as satisfaction from an extra hamburger as she does from an extra soft drink.
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