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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
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.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education