3070+problem+set+2

# 5 iv marginal rate of substitution evaluating at x 5

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5 (iv) Marginal rate of substitution = . Evaluating at x = 5, y = 3.2, marginal rate of substitution = .64. The difference between the graphical measurement and the algebraic calculation arises because it is difficult to determine the exact position of the ruler and then the exact numbers for the “rise over run,” 3070: PROBLEM SET 2: HOUSEHOLD TASTES 19

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Q2 INDIFFERENCE CURVES (a) Flying is a "bad". If flying is increased, hiking must be increased if the individual is to be indifferent, or the indifference curves slope upwards. At. A: Few flying hours. Because he does the best first, an additional hour of flying gives only small utility loss. Few hiking hours. Because he does the best first, an additional hour of hiking given large utility gain. Therefore, if the individual does extra hour of flying, he needs only a little hiking to restore his utility to the original level, or his indifference curve is flat. As move up indifference curve: hours of flying increase. Therefore the individual starts doing flying hours which give larger utility loss. hours of hiking increase. Therefore the individual starts doing hikes which gives small utility gain. Overall, if individual does extra hour of flying, he needs a lot of extra hiking to restore him to his original utility level, or his indifference curve is steep. Summarizing, indifference curves are of increasing steepness. 3070: PROBLEM SET 2: HOUSEHOLD TASTES 20
(b) If you have 2 spoonsful sugar, you are indifferent between all bundles containing one or more cups of coffee - any coffee exceeding one cup will not be drunk. If you have 1 cup of coffee - giving you more that two spoonsful sugar does not make you better-off. Overall - indifference curves are L-shaped. 3070: PROBLEM SET 2: HOUSEHOLD TASTES 21
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• Spring '14
• Utility, Marginal rate of substitution, HOUSEHOLD TASTES

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