ajaz_204_2013_2014_HW_5

so that but we know that using the fact that we see

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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 0): ⏟ 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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