3070+problem+set+2

# 2 units of other things iv using algebra what is the

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and 3.2 units of "other things". (iv) Using algebra: What is the marginal willingness to pay (marginal rate of substitution) of a 3070: PROBLEM SET 2: HOUSEHOLD TASTES 2

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unit of good x if the individual is consuming 5 units of good x and 3.2 units of "other things". Does your answer equal your answer to 5(iii)? If not, to what do your ascribe the difference? Q3. INDIFFERENCE CURVES Sketch the indifference curves represented by the following statements: (a) "I love hiking but hate flying." (b) "I always put exactly two spoonfuls of sugar in my coffee." 3070: PROBLEM SET 2: HOUSEHOLD TASTES 3
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CONSUMER PREFERENCES: ANSWERS PART 1: MULTIPLE CHOICE Q1: a; Q2: c; Q3: a; Q4: c; Q5: b. PART 2: NUMERICAL EXERCISES 1. UTILITY AND INDIFFERENCE CURVES (1) If the consumption of either good increases, utility increases. Hence the individual does show non-satiation. Formally: provided and : ; . 3070: PROBLEM SET 2: HOUSEHOLD TASTES 7
(2)(i)(a) With y preset at y=4: or x U = x ¼ 4 ¼ 0 1 2 3 4 0 1.41 1.68 1.86 2.00 Sketching: 3070: PROBLEM SET 2: HOUSEHOLD TASTES 8

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3070: PROBLEM SET 2: HOUSEHOLD TASTES 9
(2)(i)(b) The curve is upwards sloping or the marginal utility of x is always positive . The curve gets flatter as x increases from 0 to 2, but above x = 2 the curve seems pretty flat. However, using the numbers calculated above, we can calculate the marginal utility as the increase in utility if an additional unit of x is obtained as : x U Marginal utility 0 1 2 3 4 0 1.41 1.68 1.86 2.00 , 1.41 , .27 , .18 , .14 From the table, the marginal utility is always positive and the marginal utility is always decreasing.

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• Spring '14
• Utility, Marginal rate of substitution, HOUSEHOLD TASTES

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