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Question 1
a. Why are indifference curves convex to the origin? Explain what Marginal Rate of Substitution (MRS) means? When would indifference curves be linear, vertical or horizontal?
b. Explain the concepts of income effect and substitution effect? When would the individual labour supply curve bend backwards (explain using diagram)? What would be the shape of the labour supply curve if the income effect was always equal to the substitution effect (Explain using diagram)

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Mahe Alam
Mahe AlamLv10
28 Sep 2019

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Related questions

1) Why are indifference curves convex to the origin?

2) Explain what the marginal rate of substitution (MRS) means.

3) When would indifference curves be linear, vertical, or horizontal?

Willy's friend, Wesley the Worker, is a school dropout. He has no daily personal commitments. Leisure is a normal good for Wesley. He has a positively-sloped supply curve of work hours. His MRSLI is diminishing as he works fewer hours. 2.1 (2) What does diminishing MRSLI imply about the shape of Wesley's indifference curves in the traditional labour-leisure diagram? Explain briefly. [No diagram, explanation only.] Diminishing MRS means that the slope of an IC is getting smaller as Wesley works fewer hours (takes more leisure). On that basis, ICs are convex.

True or False. If False explain why it's false.

1. If all prices are doubled an money income is the left the same, the budget set does not change because the relative prices do not change.

2. A decrease in income pivots the budget line around the bundle initially consumed.

3. If preferences are well-behaved, then for any commodity bundle (x1,x2), the set of commodity bundles that are worse than (x1,x2) is a convex set.

4. The marginal rate of substitution measures the distance betwee one indifference curve and the next one.

5. If someone has the utility function U= 2min(x, y), then x and y are perfect complements for that person.

6. At the boundary optimum, a consumers indifference curve must be tangent to her budget line.

7. If two goods are substitutes, then an increase in the price of one of them will increase the demand for the other.

8. An Engel curve is a demand curve with the vertical and horizontal axes reversed.

9. An inferior good is less durable than a normal good.

10. When other variables are held fixed, the demand for a Giffen good rises when income increase.

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