Unformatted text preview: ) so that:
But we know that: Using the fact that we see that if one of the goods is a “good” good and the other good is a “neutral” good: 7 University of Toronto, Department of Economics, ECO 204, 2013 - 2014 That is, if one of the goods is a “good” good and the other is a “neutral” good, then a small increase in
decrease the consumer’s optimal utility. Thus the statement is “true”. will Here is the intuition – the following indifference curves represent preferences where good 1 is “good” and good 2 is
“neutral”: For the problem:
⏟ The optimal choice is to consume good 1 only (you could try and prove this mathematically): 8 University of Toronto, Department of Economics, ECO 204, 2013 - 2014 Now suppose the problem becomes (note how the minimum amount of good 2 that must be consumed is greater than
⏟ Now the consumer will reduce the consumption of good 1 and increase the consumption of good 2 -- the new optimal
bundle will be on a “lower” indifference curve (i.e. utility decreases): We have shown that:
( ) Question 3
) defined over the consumption set
Consider a (rational) consumer with an arbitrary utility function
} Assume the consumer likes at least on...
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This homework help was uploaded on 02/15/2014 for the course E 204 taught by Professor Ajaz during the Winter '13 term at University of Toronto.
- Winter '13