Indicate whether the following statements are “True” or “False” and provide a br
ID: 1164342 • Letter: I
Question
Indicate whether the following statements are “True” or “False” and provide a brief explanation why.
A. Suppose preferences are strictly convex. If X?Y, then 1/2X + 1/2Y ? X and 1/2X + 1/2Y ? Y.
B. If the preferences satisfy monotonicity then the bundle (2.000001,1)?(2,1).
C. If the MRS at a certain bundle is -3 then the consumer is indifferent between exchanging ?x1 of good 1 for 1/3?x1 of good 2.
D. If the MRS at a certain bundle is -5 then consumer is just willing (indifferent between the new bundle and the old bundle) to give up 0.05 units of good 2 in exchange for 0.01 units of good 1.
E. If the MRS at a certain bundle is -1/2 then I am just willing (indifferent between the new bundle and the old bundle) to give up 0.1 units of good 1 in exchange for 0.2 units of good 2.
F. If a consumer is at a certain bundle where her MRS is -4 and the rate at which the market lets her substitute good 2 for good 1 is equal to -2 (i.e. you can buy one unit of good 1 by selling two units of good 2 or buy one unit of good 2 by selling 1/2 unit of good 1), then the consumer should sell some units of good 1 in exchange for more units of good 2.
G. If a consumer is at a certain bundle where her MRS -1/4 and the rate at which the market lets her substitute good 2 for good 1 is equal to -2 (i.e. you can buy one unit of good 1 by selling two units of good 2 or buy one unit of good 2 by selling ½ unit of good 1), then the consumer should sell some units of good 1 in exchange for more units of good 2.
H. If a utility function exists, then preferences must be transitive.
I. If the price of good 1 increases, then depending on the type of good the substitution effect on good 1 can be positive or negative. J. If the price of good 1 increases, then depending on the type of good the income effect on good 1 can be positive or negative.
K. For normal goods, both the substitution and income effect move in the same direction.
L. For inferior goods, both the substitution and income effects move in the same direction.
M. If there is a constant elasticity of demand, then marginal revenue is the same for every quantity.
Explanation / Answer
A. True
* If preferences are convex then average are better than extreme.
B. False
* Monotonicity means more is better. Both the bundle are equal hence strict preference relation can't hold.
C. True
* MRS = ?Y/?X , ?X = 1/3?Y
D. False
* MRS = ?Y/?X= 5 , ?X = 1/5?Y