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Quiz 1 Solutions.pdf

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Kathleen Wong

ECO204: Quiz #1 Solutions ** The solutions provided here are very detailed because I want you to learn from them if you did not get the answer correct on the quiz. The amount of detail described here is not what is required on your quiz to get full marks. 1. (5 points) Read the statements below carefully. The first sentence provides information to you about the scenario – it is true. Decide whether the underlined statement is true, false or uncertain and explain the arguments for your answer. Answers without an explanation will not receive credit. If the answer you give is based on any assumptions, be sure to state them clearly. Otherwise, you may not receive full marks. Assume the following: it is not possible to ha ve concave indifference curves, Liesel Meminger views pea soup and books as economic goods, and sh e does not have extreme preferences. True, False or Uncertain: Liesel’s indifference cu rves for pea soup and books are downward sloping and convex shaped. The statement is uncertain. It depends on the as sumptions made about Liesel’s preferences for books and pea soup. If we assume Liesel views books and pe a soup as perfect substitutes or perfect complements, the statement is false. Indifference curves for perfect substitutes are downward- sloping straight lines because perfect substitutes indicate a fixed willingness to tradeoff between goods. Indifference curves for perfect complements are L-shaped since Liesel consumes the two goods in some fixed proportion. Increasing cons umption of only one good does not increase Liesel’s utility, which causes the indifference curves to have vertical and horizontal segments. On the other hand, if we assume Liesel view s the goods as neither perfect substitutes or perfect complements, the statement is true. She will be willing to trade-off one good for the other, but her willingness to give up one good fo r the other will diminish as we move along her indifference curve. Indifference curves that exhibit diminishing marginal rates of substitution are convex shaped. *If you only wrote the sentence in bold, you will not receive credit. The bolded sentence is not an explanation. It states an assumption. An explanation presents arguments about why you believe the underlined sentence is accurate or inaccurate. You need to have the assumption AND the explanation. Students who answered True or False with statements about the necessary assumption and provided the appropriate explanation will receive full marks. It is NOT necessary to answer ‘uncertain’ to receive full marks for this question. I/P = 120T BC
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