For each of the following statements, define all of the underlined terms. Then, explain why the statement is true or false. a. If a consumer views two goods as perfect substitutes, then their optimal choice will be a corner solution if MRS ≠ MRT. b. The substitution effect from a price increase states that the consumer will always choose a smaller amount of that good to consume. However, the income effect states that consumption can move in either direction. c. Suppose Alf and Bo have convex indifference curves. Alf likes units of "X" more than units of "Y" but Bo likes units of "Y" much more than units of "X." Then, in the optimum, Alf's marginal rate of substitution will be different from Bo's even if they face the same prices. d. Economists assume that preferences are ordinal. This implies that given two utility functions and one is a monotonic transformation of the other, then they represent the same preferences over bundles of goods.
For each of the following statements, define all of the underlined terms. Then, explain why the statement is true or false. a. If a consumer views two goods as perfect substitutes, then their optimal choice will be a corner solution if MRS ≠ MRT. b. The substitution effect from a price increase states that the consumer will always choose a smaller amount of that good to consume. However, the income effect states that consumption can move in either direction. c. Suppose Alf and Bo have convex indifference curves. Alf likes units of "X" more than units of "Y" but Bo likes units of "Y" much more than units of "X." Then, in the optimum, Alf's marginal rate of substitution will be different from Bo's even if they face the same prices. d. Economists assume that preferences are ordinal. This implies that given two utility functions and one is a monotonic transformation of the other, then they represent the same preferences over bundles of goods.
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.9P
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Question
For each of the following statements, define all of the underlined terms. Then, explain
why the statement is true or false.
a. If a consumer views two goods as perfect substitutes, then their optimal choice will be a corner
solution if MRS ≠ MRT.
b. The substitution effect from a price increase states that the consumer will always choose a smaller
amount of that good to consume. However, the income effect states that consumption can move in
either direction.
c. Suppose Alf and Bo have convex indifference curves. Alf likes units of "X" more than units of "Y"
but Bo likes units of "Y" much more than units of "X." Then, in the optimum, Alf's marginal rate of
substitution will be different from Bo's even if they face the same prices.
d. Economists assume that preferences are ordinal. This implies that given two utility functions and one
is a monotonic transformation of the other, then they represent the same preferences over bundles of
goods.
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