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
*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
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